Technical Analysis

Technical Analysis

Prices are determined by the interaction of demand and supply.

Supply and demand are affected by various factors, which may be rational or irrational

Barring minor fluctuation, prices move in trends

Change in trend can be detected in charts of market action.

History repeats itself – Past Prices Predict Future.

No Single investor influences the trend

Perspectives of TA

• Price - changes in perception

• Time - duration of a change

• Volume – intensity of change

• Breadth – quality of price changes -spread across sectors

Dow Theory

• Average discounts everything

• Market has three movements

• Price action determines trend

• Lines indicate movement

• Price/Volume relationship provides background

• Averages must confirm

Revival ofMarketConfidencePhase -1

B1

B2

T1

T2

T3

Good CorporateEarningsPhase -2

SpeculationPhase -3

PEAK

●

●

BULL MARKET

PRICE

Days

Dow Theory contd..

Dow Theory contd..

Falling trend line

Flat trend line

Rising trend line

Trend Line

Days

PRICE

X

Y

Tops

Bottoms

ABORTIVERECOVERY SECONDARY

MOVEMENTS

UPWARDPRIMARYTREND

DOWNWARDPRIMARYTREND

l + x l + z TRADING DAYS

CL

OSI

NG

PR

ICE

DOW THEORY SIGNALSDOW THEORY SIGNALS

Line Chart

xxxxx

xxxx

xxxx

0000

x x 0x 0x 0 0

x x 0x 0x 0x

x x 0x 0x 0x 0

x x 0x 0x 0x

x x x xx 0x 0

x 0x 0x 0x 0x 0

00000

00000

xxx 0x 0 0 0 0

x 0x 0x 0x 0x 0

x x x xx 0x 0

x x 0x 0x 0x 0x 0x 0 0 0 0

x x 0x 0x 0x 0x 0x 0x 0 0 0

x x 0x 0x 0x 0x 0x 0x 0 0 0

x 0x 0x 0x 0x 0

x x 0x 0x 0x

x x 0x 0x 0x 0

x x x xx 0x 0

x x 0x 0x 0x 0x 0x 0x 0 0 0

xxxx

Point Figure Chart

0 = SellX = Buy

Up FlagUp Flag Down FlagDown Flag

Point and Figure Chart

Charts

• Line Charts

• Bar Charts

• Point & Figure Charts

Price Patterns

• Triangles

• Heads & Shoulders

• Double Tops & Bottoms

• Rectangles

• Flags

• Saucers & Rounding Tops

• Gaps

TrianglesTriangles

300300

200200

400400

500500

Jan 97Jan 97 Jan 98Jan 98Connecting Lower tops

NECKLINE

BOTTOMS

SAUCER

BOTTOMS INVERSE HEAD ANDSHOULDERS

BUY

FULCRUM V BASE

COMPOUNDFULCRUM V EXTENDED

DUPLEXHORIZONTALBOTTOM

DELAYED ENDING BOTTOMS

DELAY

TOPSINVERTED SAUCER

TOPSHEAD AND SHOULDERS

SELL

NECKLINE

INVERSE FULCRUM

INVERSE COMPOUNDFULCRUM

INVERTED V

INVERTED EXTENED

DELAYED ENDING TOP

DELAY

DUPLEX HORIZONTAL TOP

Chart Patterns

PRICE

DAYS

SHARP DECLINEFAST REVIVAL

V – SHAPED REVERSAL

Jan98 Jan99

100

200300

400

500

600

700

800 Zee Telefilms

Double TopPRICE

DAYS

PRICE

DAYS

Double Bottom

X

Y

Breadth of the Market

• A-D Line - • Stocks in positive trends• %age of stocks over a moving average• Diffusion indices - rate of change in prices

(ROC)• High-Low statistics

U

D

U

A

Theory of Contrary Opinions

Odd-Lot theory – Small Investors buying and selling shares are usually wrong in their actions. Odd-lot index is defined as –

A decline in the index would indicate more purchases in relation to sales by the small investor indicating the optimistic attitude.

PurchaseslotOdd

SaleslotOddIndexlotOdd

Theory of Contrary Opinions

Mutual Funds Liquidity – When mutual funds have high liquidity, it is believed that they are bearish, so analysts buy thinking that market is at low point.

Conversely, the analysts sell when the mutual funds build large positions.

Stochastics

Measures price velocity on the premise that when the prices increase, the closing prices have a tendency to be nearer to the highs and conversely, price have a tendency to be near to the lows.

100*%LH

LCK

C-Latest Closing PriceL- n periods lowH-n periods high

Stochastics contd..

%K is smoothened to derive %D using simple moving average method. %D is n-period moving average of % K.

A 14-day %K (14-period Stochastic Oscillator) would use the most recent close, the highest high over the last 14 days and the lowest low over the last 14 days. The number of periods will vary according to the sensitivity and the type of signals desired. %K tells us that the close (115.38) was in the 57th percentile of the high/low range, or just above the mid-point. Because %K is a percentage or ratio, it will fluctuate between 0 and 100. A 3-day simple moving average of %K is usually plotted alongside to act as a signal or trigger line, called %D.

Oscillators

ROC Index – nth Day momentum index of advances and declines.

Day Advances 3-Days total of Advances (A)

Declines 3-Days total of Declines (D)

3-Day Momentum

Index

A/D*100

1 700 - 450 - -

2 662 - 334 - -

3 702 2064 400 1184 174.32

4 500 1864 600 1334 139.73

5 550 1752 511 1511 115.94

6 600 1650 429 1540 107.14

Elliot Wave Principle

• R.N. Elliot formulated this idea in a series of articles in Financial World in 1939.

• Elliot believed that the market has a rhythmic regularity that can be used to predict future prices.

• The Elliot Wave Principle is based on a repeating 8-wave cycle, and each cycle is made up of similar shorter-term cycles (“Big fleas have little fleas upon their backs to bite 'em - little fleas have smaller fleas and so on ad infinitem”).

The Elliot Wave Principle

1

2

3

4

5

A

B

C