ICICI Bank: Technical Analysis

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Group 7

The aim of the assignment was to apply technical analysis tools learnt to a security and be able to recommend a buy, hold or sell. ICICI Bank was chosen for the assignment and following techniques were used: Stochastic Oscillator MACD RSI Point and Figure Chart Japanese Candlestick Price-Volume Chart 1. Stochastic Oscillator: Most commonly used variation of the original technique is Full Stochastic Oscillator. Full Stochastic Oscillator involves calculation of its parameters %K and %L as below: Fast %K = 100*(C L)/(H L), where C Recent Close Price, H- X-period Highest High, L- X-period Lowest Low Slow %K = Y-period Simple Moving Average of Fast %K Slow %D = Z-period Simple Moving Average of Slow %K Setting used for plotting charts (see Fig. 1 & 2 in appendix): Fast %K -14 days, Slow %K 3-period SMA of Fast %K, Slow %D 3-period SMA of Slow %K The above setting is commonly denoted as Full Stochastic (14,3,3). Interpretation: Method1: Identify bearish divergence and bullish divergence and confirm signal with %K line crossing %D line. Method2: When %D Line is either below 20 (oversold region) or above 80 (overbought region), if %K line crosses above or below %D line respectively, a buy or sell signal is generated. Results: Using method 1 (indicated using blue arrows in Fig 1), 4 Buy signals (upward arrows) and 2 Sell signals (downward arrows) were generated. All signals recommended profitable transactions with some capable of generating more profit than that of others. Using method 2 (indicated using red arrows in Fig 1), 5 buy signals and 4 sell signals were generated. Bullish divergence has been noted with %D line in the period 13th June to 27th June. Presence of rising bottoms at 5.99 and 8.40 while the price of the stock is declining coupled with crossing of %K Line (38.61) above %D Line (21.7) signals a buy. Recommendation for July 2: BUY 2. MACD: It is an oscillator technique that uses 2 lines known as MACD Line and Signal Line. The MACD Line is the difference between two exponentially smoothed averages of closing price (usually 12 days and 26 days). The Signal is 9-day exponentially smoothed average of MACD Line. Interpretation: A buy signal is given when MACD Line crosses above the Signal Line. A sell signal is given when MACD Line crosses below the Signal Line. Another method consists of giving buy signal when MACD line crosses above zero line and sell signal when MACD Line below zero line. This method is not used in our analysis. Results: A total of 9 trading signals were generated in the chart (Fig 2) with 5 Buy signals (upward arrow) and 4 Sell signals (downward arrow) for stock price data of past one year. MACD Line and Signal Line have been converging since 27th June with MACD Line at -27.06 and Signal Line at 26.34 on 1st July. While MACD line has not crossed above the Signal Line as yet, the movement suggests a possibility of crossover in the coming period. A short seller or a trader wanting to enter with short term horizon could wait (HOLD) for crossover. Recommendation for July 2: BUY or HOLD

3. Relative Strength Index (RSI): In order to study the ICICIBANK, RSI was computed over 4 different rolling time periods i.e. 10 days, 14 days, 18 days and 21 days as these are the regularly followed time periods for technical analysis using RSI. This was done so as to understand which time frame caters to ICICIBANKs forecast in best possible way as most of the securities tend to follow close association with certain time period. Interpretation: RSI provides information on whether or not an asset is overbought or oversold. The way RSI is constructed forces it to lie within 0 and 100. Typically if the values are more or less symmetrically distributed around 50 then values below 30 suggest the asset is oversold while a value above 70 represents an overbought situation. This 30-70 range can vary with volatility of the underlying asset. Results: Over a period of past one year, a total of 12 trading signals were generated in the chart as per 10 day RSI (Fig 3.1) with 5 Buy signals (indicated by star) and 7 Sell signals (depiction: true signal by oval and false by lightening). Out of the 7 sell signals, 2 were false and would have incurred losses to the investor. Typical time frame for which investor will have to maintain short position would be 6-8 weeks while the long position would be held for 3-4 weeks. When similar trends were searched for in 14 day, 18 day and 21 day RSIs (Fig 3.2, 3.3 & 3.4); the indicator failed to move below 30 or above 70 many a times as ICICIBANK is a moderately low volatile share. In addition to that most of the signals provided by these long time-period turned out to be false ones to enter profit-making positions. Thus 10 day time-period is best for ICICIBANK. As on 1st of July 10 day RSI value for ICICIBANK was 37.22 and the RSI was in the uptrend (i.e. it was moving upwards from sub-30 levels so the trend looks bullish. Recommendation for July 2: BUY 4. Point and Figure Chart: Point and figure charts are constructed differently from other charts; they have a clear focus on entry and exit levels but no clear focus on holding periods. Point and Figure chart helps in eliminating the noise which is caused on day to day basis and get a clear support and resistance levels. Also it helps gauge the reversals and breakouts/breakdowns as the noise is eliminated. For ICICIBANK, the Box Size was maintained at Rs. 7 while reversal sixe was maintained at 3 boxes. Interpretation: P&F chart gives buy (sell) when the last signal on the chart was a buy (sell) signal, i.e. the last breakout was a column of Xs (Os) going higher (lower) than the previous column of Xs (Os); and no Sell (Buy) signal has happened since the buy (sell) signal. This rule tends to hold good for ICICIBANK when the previous levels are breached by at least 2 boxes as seen on 6 occasions previously but it also gave 3 false signals. Results: Based on the chart shown in Fig 4, the last column of Os was a clear sell signal (it is lower than the previous one) but the last column of Xs has not moved above the level of Xs as determined by the previous column of the Xs so there is no clear indication of buy and investors can move on to hold their short positions or can sell/short it going forward. Recommendation for July 2: SELL 5. Japanese Candlestick Chart: Candlestick charts are short term trend charts. A Japanese candlestick pattern can be thought of as a psycho local depiction of traders mentality at a time. Candle patterns consist of a single or multiple lines but never extend over five days. In the case of ICICI a three day reversal pattern was identified preceding the date of analysis. Interpretation: There are multiple patterns that a candlestick chart may show when candlesticks from 1 to 5 days are taken into account. One of these patterns is the matching high bearish reversal candlestick pattern. In this 3 day pattern a long

black day (closing price below opening price) is followed by two white days (closing price above opening price) but the closing price and the highs of the two white days are at the same level. This pattern indicates that trader sentiment is bearish which is preventing the price increase so there would be a downward trend the following day. Results: In case of ICICI, as seen in figure 5, the matching high bearish reversal pattern was identified over the three trading days from June 27th to July 1st. A long black candle on June 27th is followed by two short white candles on June 28th and July 1st with the highs and closing price of both at approximately the same level. The price of the stock on July 2nd can be expected to be bearish. No other distinguishable pattern could be identified from the chart in the trading days immediately preceding the analysis period. Recommendation for July 2: SELL 6. Price-Volume chart: Volume by Price can be used to identify current support and resistance levels or estimate future support and resistance levels. The Price Volume Trend is helpful in seeing divergences: Increasing price accompanied by an increasing Price Volume Trend confirms the price trend upward and vice-versa. Increasing price accompanied by a decreasing or neutral Price Volume Trend value is a divergence and is indicating that the price movement upward is weak and lacking conviction and vice-versa Interpretation: Looking at the year (Jul-June 2013) pattern (Figure 6), the stock is trading in a well formed down trending channel post Double top, with the recent uptrend a few days back. Both the double bottom and Double Top has been formed on the support zone and resistance zone (volume level is also reduced in the second top and bottom curve) indicating strong ranges with increasing trend in resistance. So it can be established that the support zone is around 1030-1035 with the bulls actively defending the further downtrend. One thing evident from the graph is the Double Bottom and Double Top pattern formation at the trend lines (the support and resistance zone). In case of Double bottom (Mar-Apr 2013), the reversal happened with the market considering the stock cheap enough for an attractive investment. The volumes also signified the uptrend with bulls defending against the support zone. Similar is the case with Double Top (May-June 2013) with the decline due to trend reversal (price decline approx. same to the high of the double tops) and partly due to final dividend news. Results: The past one month (June) has seen the declining trend with stock trending from 1150 to 1130. As per last week trend (June 25th onwards), the security ceased to decline below the support line of 1030 and took a bullish turn. Historical trend indicates the formation of reversal patterns at the trend lines. So, taking a cue from the past 3 months trend, a new region of Double Bottom is a possibility which in a short term is bearish with the indication that the price may trend near the support price 1030 from the current 1069 and that uptrend will happen in a long run, thus long term is bullish. Recommendation for July 2: HOLD (short term) and BUY (long term) 7. Summary: Table below summarizes the findings for ICICI Bank. Technical Analysis Tool Stochastic (Full) MACD (12,26,9) RSI (10-day) Point and Figure Chart (7,3) Japanese Candlestick Price Volume

Recommendation BUY BUY or HOLD BUY SELL SELL HOLD(short term) and BUY(long term)

As can be seen from the table, 4 out of 6 techniques signal a buy. All of the Oscillator techniques used in the analysis i.e. Stochastic, MACD, and RSI signal a BUY. As each technique is different in its way of analyzing stock prices and generating signals, the result is an evidence of the same. An investor should carefully choose techniques depending on the security (eg. 10-day RSI for ICICI Bank) and time horizon of investment.

Appendix:

Fig 1. Analysis using Stochastic Oscillator

Fig 2. Analysis using MACD

Fig. 3.1. Analysis using RSI (10 day)

Fig. 3.2. Analysis using RSI (18 day)

Fig. 3.3. Analysis using RSI (14 day)

Fig. 3.4. Analysis using RSI (21 day)

Fig. 4. Analysis using Point and Figure Chart (Box Size: Rs. 7, Reversal Size: 3 Boxes)
1100 1080 1060 1040 1020 1000 980 1 2 3 4 5 6 7 8 9

Fig. 5. Analysis using Candlestick Chart (Matching Highs a two day reversal pattern identified)

Fig. 6 Analysis using PV Chart