Technical Analysis

Himanshu Puri Faculty DIAS

What the technical analyst beliefs

Past is an indicator of the future Security prices and volumes move in trends Market price reflects all the different investor opinions about a security

Shortcomings of fundamental Analysis Accounting policies may vary from company to company thus making comparison difficult. Full information may not be available to the analyst. Non-quantifiable factors may not show up in the financial statements (perceptions) Economic analysis, then industry and then company analysis.too much hard work

Fundamental v/s Technical

Factors Source of Info Type of Info

Fundamental Economic data and company data GDP, Inflation, Industry profitability, Market share, Sales, earnings Accounting ratio and discounted cash flow

Technical Market Data Price and Volume

Techniques used

Chatting, patterns and indicators

Objective
Philosophy

To access intrinsic value

What to invest in?

To identify trend
When to invest?

Technical Analysis Tools

Indicators Moving Averages RSI (Relative Strength Index) Elliott Wave theory Dow Jones theory Charts Line, Bar, Point and figure, Candle Stick Patterns Head & Shoulders Double tops/bottoms Triangle Flags Support and Resistance Level Relative Strength Analysis Rate of Change

DOW THEORY

The average Discounts Everything

The share prices quoted in the market reflect all known and predictable factors into account.

The market has three movements

Primary movements

One year to several years Rising (bull) or falling (bearish) trend Long term movement in prices Run counter to primary trend and are reactionary in nature Important Decline in a bull market or advance in a bear market. Lasting three weeks to three months Technical Corrections

Secondary reactions

DOW THEORY
Minor
No

movements

implications for long term forecasting Usually part of primary or secondary movements Ripples

DOW THEORY

DOW THEORY

ELLIOTT WAVE THEORY

ELLIOT WAVE THEORY

One complete cycle has 8 waves, five way advance followed by three way down. Waves one, three and five represent the 'impulse', or minor up-waves in a major bull move. Waves two and four represent the 'corrective,' or minor down-waves in the major bull move.

The waves lettered A and C represents the minor downwaves in a major bear move, while B represents the one upwave in a minor bear wave.

ELLIOT WAVE THEORY

ELLIOT WAVE THEORY ANALYSIS

ELLIOT WAVE THEORY ANALYSIS

The S&P 500 remains in bull mode and continues to outperform the Nasdaq 100. In Elliott terms, the index has taken on a 5-Wave structure since mid August. Wave 1 extends up to 1142, Wave 2 declined to 1090, Wave 3 advanced to 1218 and Wave 4 fell to 1163.

The recent move above the upper trend line of the falling wedge represents the beginning of Wave 5.

ELLIOT WAVE THEORY ANALYSIS

As a Wave 5 advance, the upside projection would be to around 1240-1245. Wave 5 is often 62 percent rise of Wave 3 or equal to Wave 1. As 62% of Wave 3, the upside target would be to 1242 (1218 1090 = 128, 128 x .62 = 79, 1163 + 79 = 1242). Should a repeat of Wave 1 occur, the upside target would be to 1245 (1142 1060 = 82, 1163 + 82 = 1245).

ELLIOT WAVE THEORY ANALYSIS

Regardless of the targets, Wave 5 should move above the high of Wave 3 (1218). As long as the blue trend line extending up from the late October low holds, the bull trend is firmly in place and further strength should be expected.

CHARTS

1150

1200

1250

1300

1350

1400

1/4/1999 1/18/1999 2/1/1999 2/15/1999 3/1/1999 3/15/1999 3/29/1999 4/12/1999 4/26/1999 5/10/1999 5/24/1999 6/7/1999 6/21/1999

Charts

Line Charts: formed by joining the closing prices of a security against the date

Bar Charts: formed by joining the high and low prices for a given day. The closing price is indicated as a tick on this line.

1400 1350 1300 1250 1200 1150 1100

1/4/1999

2/1/1999

3/1/1999

1/18/1999

2/15/1999

3/15/1999

3/29/1999

4/12/1999

4/26/1999

5/10/1999

5/24/1999

6/7/1999

6/21/1999

Point-and-figure charts attempt to show only major price moves and their direction. The point and figure chart maker decides what price move is major. That is, it could be Rs.2, Rs.5, or any other level.

A major up-move is marked with an X A major down-move is marked with an O

Start a new column when there is a direction change. Buy and sell signals are generated when new highs or new lows are reached.

For the following sequence of prices draw the point and figure chart
DATE 1 30 DATE 2 32 DATE 3 34 DATE 4 36 DATE 5 38 DATE 6 36 DATE 7 36 DATE 8 34 DATE 9 32 DATE 10 32

DATE 11 30

DATE 12 34

DATE 13 36

DATE 14 38

DATE 15 40

DATE 16 42

DATE 17 44

DATE 18 46

DATE 19 48

50 48 46 44 X X X

42
40 38 X 36 X 34 X O O

X
X X X X

32 X
30

O
O

Candle Stick Chart

Patterns
Head & Shoulders When the stock price pierces the neckline after the right shoulder is finished, it is time to sell.

Inverse Head & Shoulders When the stock price pierces the neckline after the right shoulder is finished, it is time to buy.

Double Top/Double bottoms Indicates the resistance and support level for the stock.
Double Top

Target Target

Double Bottom

Triangles Three formations, namely: Ascending: The top part of the triangle appears flat, while the bottom part of the triangle has an upward slant. Indicates bullish trend Descending: Unlike the ascending triangle, this time the bottom part of the triangle appears flat. The top part of the triangle has a downward slant. Indicates bearish trend. Symmetrical: Symmetrical triangles can be characterized as areas of indecision.
Ascending

Symmetrical Symmetrical

Descending

Support & Resistance levels

A support level is a price or level below which a stock or the market as a whole is unlikely to go, Resistance level is a price or level above which a stock or the market as a whole is unlikely to rise. Resistance and support areas are usually viewed as psychological barriers A breakout occurs when a stock (or the market) passes through either a support or a resistance level.

INDICATORS

Relative Strength Analysis

Relative strength charts measure the performance of one investment relative to another (most of the time between security and the market index).

Pr ice of the stock Re lative Strength Market Index

Rising RS means that the stock is doing better than the Market and its prices moves faster than the others

Moving Averages
Moving average charts are average daily prices or index levels, calculated using a fixed number of previous days prices or levels, updated each day. Because daily price fluctuations are smoothed out, these charts are used to identify trends.
4400 4300 4200 4100 4000 3900 3800 3700 3600 3500 3400 3300 3200 3100 3000 2900 2800 2700 2600 2500

30 Day MA 60 day MA Price

6/27/2006

7/27/2006

8/27/2006

9/27/2006

1/27/2007

2/27/2007

10/27/2006

11/27/2006

12/27/2006

3/27/2007

Example: Suppose the technical trader calculates a 30-day and a 60-day moving average of a stock price.

If the 30-day crosses the 60-day from above, it is a bearish signaltime to sell. If the 30-day crosses the 60-day from below, it is a bullish signaltime to buy.

When the shorter-term moving average line is consistently above the longer-term line, it is considered a bullish signal

MOVING AVERAGES
Simple Moving Average Weighted Moving Average Exponential Moving Average

SMA

WMA

SMA,WMA, EMA

The simple moving average gives equal weight to all data points.

By nature, it is the "true" average.

The exponential give the most recent data points the highest rankings or "weightings".

ROC INDEX
Rate of Change = 100 (Y/Yx) Y represents the most recent closing price, and Yx represents the closing price a specific number of days ago. ROC rising gives a short-term bullish signal Bearish sign would have the ROC falling.

ROC

ROC

ROC index above reference line implies the current price is at a higher level prevailing X days before. If ROC is above reference line and rises, then the rate at which price increases grows. Any fall in ROC represents drop in momentum. If index is falling but still above the reference line, it represents a slow down in the rate of price increase

Momentum Strategies
Relative Strength Index Measures the relative internal strength of the stock against itself.

100 RSI 100 (1 RS )

Average of n' days up closes where RS Average of n' days down closes
RSI approaching 70 indicates overbought (overvalued) position while RSI approaching 30 indicates oversold (undervalued) position.

RSI (RELATIVE STRENGTH INDEX)

Measures the strength of a stock/Market against itself. The indicator is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is overbought, A reading below 30 is used to suggest that it is oversold. RSI = 100 - 100 /(1 + RS ) RS = Average of x days' up closes / Average of x days' down closes

RELATIVE STRENGTH INDEX

3-Apr-06 1 4-Apr-06

3142.15 3152.7 u

Up Avg 3152.7

Down Avg 0

2
3 4 5 6 7 8 9 10

5-Apr-06
7-Apr-06 10-Apr-06 12-Apr-06 13-Apr-06 17-Apr-06 18-Apr-06 19-Apr-06 20-Apr-06

3114.75 d
3167 u 3189.3 u 3075.65 d 3018.85 d 3229.95 u 3336 u 3278.8 d 3276.6 d

0
3167 3189.3 0 0 3229.95 3336 0 0 1607.495

3114.75
0 0 3075.65 3018.85 0 0 3278.8 3276.6 1576.465

Relative Strength=1607.50/1576.47 =1.02 RSI=50.49