Description
Technical analysts believe that the forces of supply and demand are reflected in the patterns of price and volume of trading.
TECHNICAL ANALYSIS
? Technical analysts believe that the forces
of supply and demand are reflected in the
patterns of price and volume of trading.
? Technical analysis is based on demand
supply approach of the capital market .
? If the demand for a share is greater than its
supply, then it is expected that the price
would rise.
? This prompts a technical analyst to buy the
share.
? On the other hand, if the supply of a share is
more than the demand for that share, the
price would be expected to fall down.
? Thus an analyst sells the share to get profit.
? Technical analysis is based on the assumption that history
keeps on repeating itself.
? The shift from supply to demand and vice-versa goes on cyclically.
? This shift occurs gradually and not instantaneously.
? Since these shifts occur gradually, it is possible to detect the trend
and can be explored profitably.
? A technical analyst identifies the trend reversal
at an early stage and monitors the trend on a
continuous basis.
? He trades along the new direction until his
analysis leads to a conclusion that the trend is
going to be reversed.
? The analyst monitors the price on a daily,
weekly or monthly basis.
? The technical analysts employ a variety of
tools to assess the overall market movement.
? They record historical financial data on charts
and bars and study these charts and bars to
identify the patterns of market movement.
? These patterns are then used to predict the
future prices.
? 'Nothing lasts for ever' has the true applicability in
the share price movement.
? The price of a share which has a rising trend today,
may fall after a few days.
? Similarly the price of a share which has a falling
trend today, may rise after a few days.
? Most trends usually focus on long term trend for
analysing the general market conditions.
? However, the short term trend can be used for
individual shares.
Technical Tools
? Generally used technical tools are, Dow
theory ,volume of trading, short selling, odd
lot trading, bars and line charts and moving
average.
The Dow Theory
? The Dow theory is one of the oldest and most
famous technical tools developed by Charles
Dow in 1884. Dow had relied exclusively on
the closing price .
Assumptions of Dow theory
? 1.No single individual can influence the major
trend of the market.
? 2.Market is affected by every news.
? 3.It is not a tool to beat the market but
provides a way to understand it better.
Types of trend
? The trend is divided into primary, intermediate and
short term trend.
? The primary trend may be the broad upward or
downward movement that may last for a year or two.
? The intermediate trends are corrective movements
,which may last for 3 weeks to 3 months.
? The short term trend refers to the day to day price
movement. It is also known as oscillatons or
fluctuations.
? These three types of trends are compared to tide
,waves and ripples of the sea.
Trends of Share Price Movement
? The movement of share price can be in three
directions.
? It can either rise, fall or can move narrowly.
? When the share price rises the trend is said to
be rising.
? Similarly when share price moves down, it is
called falling trend.
? When the share price moves in a narrow range,
the trend is said to be flat.
? Share prices do not rise or fall in a straight line.
The share prices move in zigzag manner.
? The rise or fall of share price is interrupted by a
counter move which is known as 'reaction'.
? These reactions are in the opposite direction of
the basic trend.
? If the share price is rising, the counter move
would be falling in share price.
? Similarly if the basic trend is falling, the counter
move would be rising in share price.
Trend line
? The trend lines are straight lines drawn
connecting either the tops or bottoms of the
share price movement. To draw a trend line
,the technical analyst should have at least
two tops or bottoms. Trend line can be:
? 1.Rising trend line
? 2.Flat trend line
? 3.Falling trend line
Rising trend line
Falling trend line
Flat trend line
Primary Trend
? The security price trend may be either increasing or
decreasing .
? If it is increasing trend it is called bull market.
? The bull market shows three clear cut peaks.
? Each peak is higher than the previous peak. The
bottoms are also higher than the previous bottoms.
? The phases leading to the three peaks are revival,
improvement in corporate profit and speculation.
? The reverse is true with the bear market.
? Here the first phase of fall starts with the decrease of
hopes. In the second phase ,companies are reporting
lower profits and dividends. The final phase is due to
huge sale of shares.
? Here the tops and bottoms are lower than the previous
one.
Secondary trend
? The secondary trend or the intermediate trend
moves against the main trend and leads to
correction.
? In the bull market the secondary trend would result
in the fall of about 33-66% of the earlier rise.
? In the bear market the secondary trend would result
in the increase of about 33-66% of the earlier fall.
? Intermediate trend corrects the overbought and
oversold condition. It provides the breathing space
to the market.
Minor trends
? Minor trend or tertiary moves are simply the
daily fluctuations.
? It tries to correct the secondary trend
movement.
? It is better for the investors to concentrate on
the primary or secondary trends than on the
minor trends.
Support and Resistance
? A support level exists at a price where considerable
demand for that stock is expected to prevent further fall
in the price level. In the support level demand for the
particular share is expected.
? When the stock touches a certain level and then drops
this is called resistance and if the stock reaches down to
a certain level and then rises there exists a support.
? If the share price moves down to the support level ,then
it is a bearish market. But if the share price moves
upward to the resistance level then it is a bullish market.
Example
? If a share price moves around rs150 for some
weeks, then it may rise and reach rs 210.At this
point the price halts and then falls back. The share
keeps on falling back to its original price rs 150 and
halts. Then it moves upward.
? Here rs 150 becomes the support level. At this point
the share price is cheap and investors buy it and
demand makes the price move upward. Rs 210
becomes the resistance level ,the price is high and
there would be selling pressure resulting in the
decline of the price.
Volume of trade
It is one of the indicator for technical analyst. Volume
expands along with the bull market and narrows
down in the bear market.
If the volume falls with rise in price or vice-versa, it is
a matter of concern for the investor and the trend
may not persist for a longer time.
If the volumes decline for five consecutive days, then
it will continue for another four days and the same is
true in increasing volume.
Short sale
? It refers to the selling of shares that are not
owned.
? The person can sell now in the hope of
purchasing at a lower price in the future to
make profits.
Odd lot trading
? Shares are generally sold in a lot of hundred.
? Share sold in smaller lots fewer than 100 are
called odd lot.
? Such buyers and sellers are called odd
lotters.
? When the professional investor dominate the
market the stock market is technically strong.
Moving average
? When the share price movement is of highly fluctuating
nature, it becomes difficult to study the trend of the
market. In this situation moving averages are used to
judge the underlined trend
? For identifying short term trend ,10 day to 30 day moving
averages are used. In the case of medium term trend 50
days to 125 day are adopted.200 day moving average is
used to identify long term trend.
Example
? Calculation of 5 day moving average
? Day price average
? 1 255 -
? 2 261 -
? 3 269 266.2
? 8 273 270.8
? 9 273 272.8
? 10 278 273.2
? 11 271 274
? 12 271 273.8
Charts
? It is the graphic presentation of data. Uses of
charts are
? 1.Spots the current trend for buying and
selling.
? 2.Indicates the probable future action of the
market by projection.
? 3.Shows the past historic movement.
? 4.Indicates the important areas of support
and resistance.
Point and figure chart
? Here the price changes in relation to previous
prices are shown. So the change of price
direction can be easily found. A fairly long
period should be covered so that definite
shapes can be observed.
Bar chart
? The procedure for preparing a vertical line or
bar chart is simple. The vertical dimensions
of the line represent price, the horizontal
dimensions indicates the time. It can be
prepared for a day ,a week, or even a year.
Chart patterns
? Charts reveal certain patterns that are of
predictive value. Some of the widely used
chart patterns are
? V formation
? Tops and bottoms
? Double top and bottom (M,W)
? Head and shoulders
? Inverted head and shoulders
Triangles,Flags,Pennants
? The triangles can be
? 1.Symmetrical triangle
? 2.Ascending triangle
? 3.Descending triangle
Bullish Pennant
Bearish Pennant
Technical Analysis vs. Fundamental
Analysis
? 1.Fundamental analyst study the financial
strength of corporate, growth of sales,
earnings and profitability. But the technical
analysts mainly focus the attention on the
past history of prices.
? 2.Fundamental analyst try to find out the long
term values of shares. But the technical
analysts mainly focus on the short term price
movement.
? 3. Fundamental analyst are of the opinion
that supply and demand for stocks depend on
the underlying factors. But technicians
opinion is that they can forecast supply and
demand by studying the prices and volume of
trading.
doc_378833948.ppt
Technical analysts believe that the forces of supply and demand are reflected in the patterns of price and volume of trading.
TECHNICAL ANALYSIS
? Technical analysts believe that the forces
of supply and demand are reflected in the
patterns of price and volume of trading.
? Technical analysis is based on demand
supply approach of the capital market .
? If the demand for a share is greater than its
supply, then it is expected that the price
would rise.
? This prompts a technical analyst to buy the
share.
? On the other hand, if the supply of a share is
more than the demand for that share, the
price would be expected to fall down.
? Thus an analyst sells the share to get profit.
? Technical analysis is based on the assumption that history
keeps on repeating itself.
? The shift from supply to demand and vice-versa goes on cyclically.
? This shift occurs gradually and not instantaneously.
? Since these shifts occur gradually, it is possible to detect the trend
and can be explored profitably.
? A technical analyst identifies the trend reversal
at an early stage and monitors the trend on a
continuous basis.
? He trades along the new direction until his
analysis leads to a conclusion that the trend is
going to be reversed.
? The analyst monitors the price on a daily,
weekly or monthly basis.
? The technical analysts employ a variety of
tools to assess the overall market movement.
? They record historical financial data on charts
and bars and study these charts and bars to
identify the patterns of market movement.
? These patterns are then used to predict the
future prices.
? 'Nothing lasts for ever' has the true applicability in
the share price movement.
? The price of a share which has a rising trend today,
may fall after a few days.
? Similarly the price of a share which has a falling
trend today, may rise after a few days.
? Most trends usually focus on long term trend for
analysing the general market conditions.
? However, the short term trend can be used for
individual shares.
Technical Tools
? Generally used technical tools are, Dow
theory ,volume of trading, short selling, odd
lot trading, bars and line charts and moving
average.
The Dow Theory
? The Dow theory is one of the oldest and most
famous technical tools developed by Charles
Dow in 1884. Dow had relied exclusively on
the closing price .
Assumptions of Dow theory
? 1.No single individual can influence the major
trend of the market.
? 2.Market is affected by every news.
? 3.It is not a tool to beat the market but
provides a way to understand it better.
Types of trend
? The trend is divided into primary, intermediate and
short term trend.
? The primary trend may be the broad upward or
downward movement that may last for a year or two.
? The intermediate trends are corrective movements
,which may last for 3 weeks to 3 months.
? The short term trend refers to the day to day price
movement. It is also known as oscillatons or
fluctuations.
? These three types of trends are compared to tide
,waves and ripples of the sea.
Trends of Share Price Movement
? The movement of share price can be in three
directions.
? It can either rise, fall or can move narrowly.
? When the share price rises the trend is said to
be rising.
? Similarly when share price moves down, it is
called falling trend.
? When the share price moves in a narrow range,
the trend is said to be flat.
? Share prices do not rise or fall in a straight line.
The share prices move in zigzag manner.
? The rise or fall of share price is interrupted by a
counter move which is known as 'reaction'.
? These reactions are in the opposite direction of
the basic trend.
? If the share price is rising, the counter move
would be falling in share price.
? Similarly if the basic trend is falling, the counter
move would be rising in share price.
Trend line
? The trend lines are straight lines drawn
connecting either the tops or bottoms of the
share price movement. To draw a trend line
,the technical analyst should have at least
two tops or bottoms. Trend line can be:
? 1.Rising trend line
? 2.Flat trend line
? 3.Falling trend line
Rising trend line
Falling trend line
Flat trend line
Primary Trend
? The security price trend may be either increasing or
decreasing .
? If it is increasing trend it is called bull market.
? The bull market shows three clear cut peaks.
? Each peak is higher than the previous peak. The
bottoms are also higher than the previous bottoms.
? The phases leading to the three peaks are revival,
improvement in corporate profit and speculation.
? The reverse is true with the bear market.
? Here the first phase of fall starts with the decrease of
hopes. In the second phase ,companies are reporting
lower profits and dividends. The final phase is due to
huge sale of shares.
? Here the tops and bottoms are lower than the previous
one.
Secondary trend
? The secondary trend or the intermediate trend
moves against the main trend and leads to
correction.
? In the bull market the secondary trend would result
in the fall of about 33-66% of the earlier rise.
? In the bear market the secondary trend would result
in the increase of about 33-66% of the earlier fall.
? Intermediate trend corrects the overbought and
oversold condition. It provides the breathing space
to the market.
Minor trends
? Minor trend or tertiary moves are simply the
daily fluctuations.
? It tries to correct the secondary trend
movement.
? It is better for the investors to concentrate on
the primary or secondary trends than on the
minor trends.
Support and Resistance
? A support level exists at a price where considerable
demand for that stock is expected to prevent further fall
in the price level. In the support level demand for the
particular share is expected.
? When the stock touches a certain level and then drops
this is called resistance and if the stock reaches down to
a certain level and then rises there exists a support.
? If the share price moves down to the support level ,then
it is a bearish market. But if the share price moves
upward to the resistance level then it is a bullish market.
Example
? If a share price moves around rs150 for some
weeks, then it may rise and reach rs 210.At this
point the price halts and then falls back. The share
keeps on falling back to its original price rs 150 and
halts. Then it moves upward.
? Here rs 150 becomes the support level. At this point
the share price is cheap and investors buy it and
demand makes the price move upward. Rs 210
becomes the resistance level ,the price is high and
there would be selling pressure resulting in the
decline of the price.
Volume of trade
It is one of the indicator for technical analyst. Volume
expands along with the bull market and narrows
down in the bear market.
If the volume falls with rise in price or vice-versa, it is
a matter of concern for the investor and the trend
may not persist for a longer time.
If the volumes decline for five consecutive days, then
it will continue for another four days and the same is
true in increasing volume.
Short sale
? It refers to the selling of shares that are not
owned.
? The person can sell now in the hope of
purchasing at a lower price in the future to
make profits.
Odd lot trading
? Shares are generally sold in a lot of hundred.
? Share sold in smaller lots fewer than 100 are
called odd lot.
? Such buyers and sellers are called odd
lotters.
? When the professional investor dominate the
market the stock market is technically strong.
Moving average
? When the share price movement is of highly fluctuating
nature, it becomes difficult to study the trend of the
market. In this situation moving averages are used to
judge the underlined trend
? For identifying short term trend ,10 day to 30 day moving
averages are used. In the case of medium term trend 50
days to 125 day are adopted.200 day moving average is
used to identify long term trend.
Example
? Calculation of 5 day moving average
? Day price average
? 1 255 -
? 2 261 -
? 3 269 266.2
? 8 273 270.8
? 9 273 272.8
? 10 278 273.2
? 11 271 274
? 12 271 273.8
Charts
? It is the graphic presentation of data. Uses of
charts are
? 1.Spots the current trend for buying and
selling.
? 2.Indicates the probable future action of the
market by projection.
? 3.Shows the past historic movement.
? 4.Indicates the important areas of support
and resistance.
Point and figure chart
? Here the price changes in relation to previous
prices are shown. So the change of price
direction can be easily found. A fairly long
period should be covered so that definite
shapes can be observed.
Bar chart
? The procedure for preparing a vertical line or
bar chart is simple. The vertical dimensions
of the line represent price, the horizontal
dimensions indicates the time. It can be
prepared for a day ,a week, or even a year.
Chart patterns
? Charts reveal certain patterns that are of
predictive value. Some of the widely used
chart patterns are
? V formation
? Tops and bottoms
? Double top and bottom (M,W)
? Head and shoulders
? Inverted head and shoulders
Triangles,Flags,Pennants
? The triangles can be
? 1.Symmetrical triangle
? 2.Ascending triangle
? 3.Descending triangle
Bullish Pennant
Bearish Pennant
Technical Analysis vs. Fundamental
Analysis
? 1.Fundamental analyst study the financial
strength of corporate, growth of sales,
earnings and profitability. But the technical
analysts mainly focus the attention on the
past history of prices.
? 2.Fundamental analyst try to find out the long
term values of shares. But the technical
analysts mainly focus on the short term price
movement.
? 3. Fundamental analyst are of the opinion
that supply and demand for stocks depend on
the underlying factors. But technicians
opinion is that they can forecast supply and
demand by studying the prices and volume of
trading.
doc_378833948.ppt