Technical Analysis

Presentation on Technical Analysis

Assumptions Underlying Technical Analysis

Market Value is determined by interaction of demand and supply.

Changes in trend are caused by shifts in demand and supply.

Some chart patterns tend to repeat themselves

Consideration of Technical Analysis

Price Time Volume Breadth

What is Technical Analysis?

Evaluating securities by analyzing statistics generated by market activity such as past prices and volume. Use charts and other tools to identify patterns that can suggest future activity.

Line Chart

*****Created by connecting a series of closing prices together with a line.

Bar Chart
High Close
High

Open

Open Low

Close Low

****Red/black bar (closing is below the open) green/white bar (closing is above the open)

Candlestick
High
High

Open

Close

Body

Body

Close Low

Open

Low ****Red/black candle (close is below open) green/white candle (close is above open)

Point & Figure Chart

A chart that plots day-to-day price movements without taking into consideration the passage of time. Point and figure charts are composed of a number of columns that either consist of a series of stacked Xs or Os. A column of Xs is used to illustrate a rising price, while Os represent a falling price.

Types of Pattern
Head And Shoulders Pattern Inverse Head And Shoulders Cup and Handle Rounding Bottom Rounding Top Double Bottom (W) Double Top (M) Triple Top Triple Bottom Triangle Flag Wedge

Head And Shoulders Pattern

Rises to a peak and subsequently declines. Then, the price rises above the former peak and again declines. And finally, rises again, but not to the second peak, and declines once more.

Inverse Head And Shoulders

The price falls to a trough and then rises. The price falls below the former trough and then rises again. Finally, the price falls again, but not as far as the second trough.

Rounding Bottom

Rounding bottoms are found at the end of extended downward trends and signify a reversal in long-term price movements. Form the shape of a "U".

Rounding Top

A rounding top may form at the end of an extended upward trend and indicates a reversal in the long-term price movement. Form the shape of an upside down "U".

Double Top (M)

Double-top pattern is

found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered to be reversed and the security is expected to move lower. It takes the shape of M`.

Double Bottom (W)

This is the opposite chart pattern of the double top as it signals a reversal of the downtrend into an uptrend. This pattern will closely resemble the shape of a "W".

Cup and Handle

A pattern on bar charts resembling a cup with a handle. The cup is in the shape of a "U" and the handle has a slight downward drift. The righthand side of the pattern has low trading volume.

Triple Top

Predict the reversal of a prolonged uptrend. The bounce off the resistance near the third peak is a clear indication that buying interest is becoming exhausted.

Triple Bottom

Predict the reversal of a prolonged downtrend. The third bounce off the support is an indication that buying interest (demand) is outweighing selling interest (supply) and that the trend is in the process of reversing.

Ascending Triangle
In an ascending triangle, one trendline is drawn horizontally at a level that has historically prevented the price from heading higher, while the second trendline connects a series of increasing troughs. Traders enter into long positions when the price of the asset breaks above the top resistance

Descending Triangle
One trendline that connects a series of lower highs and a second trendline that has historically proven to be a strong level of support. Traders enter into short positions when the price breaks below the support level.

Symmetrical Triangle

The pattern is identified by drawing two trendlines that connect a series of sequentially lower peaks and a series of sequentially higher troughs. Both trendlines act as barriers that prevent the price from heading higher or lower, but once the price breaches one of these levels, a sharp movement often follows.

Flag
Flag looks like a rectangle. The rectangle is formed by two parallel trendlines that act as support and resistance for the price until the price breaks out. The buy or sell signal is formed once the price breaks through the support or resistance level, with the trend continuing in the prior direction.

Wedge

Wedge signals a reverse of the trend that is currently formed within the wedge itself. The falling wedge is a bullish pattern. A rising wedge is a bearish pattern.

Support and Resistance

Support is where a falling price can be expected to halt, temporarily, due to a concentration of demand. Resistance is where a rising price can be expected to halt temporarily due to a concentration of supply.

Resistance

Support

When the price line break through the support new support line is formed at th new low and the previous support becomes the new resistance.

Resistance Support

Support

When the price line cut the resistance new resistance is formed at the new high and the previous resistance becomes the new support.

Resistance Support

Support and resistance points are likely to develop

At previous highs and lows At the upper and lower areas of gaps

At extreme high low days - emotional points on chart

At trendlines and moving averages

At in the region of classic price patterns

Rules for determining significant support and resistance zones

The more times a zone has been able to halt or reverse a price trend, the greater its significance. The greater the price move preceding a given support or resistance zone, the greater its significance. The more a security changes hands at a particular level, the more significant that level is likely to be as a support or resistance zone.

Volume
Use as confirmation
Increasing Volume = Confirmation [Price should go below ( above ) the low (high) of the high volume day ] Higher the volume = Stronger the move Indicates strength of the move

Trend line

***** Depicts the general directionin which the security is headed.

Moving Average (MA)

Emphasize the direction of a trend and smooth out price and volume fluctuations.

An upward momentum is said to begin when a price line crosses above a moving average.
Downward momentum is said to begin when a price line crosses below a moving average average.

Types of Moving Averages

Simple Moving Average

Weighted Moving Average

Exponential Moving Average (EMA)

Crossover between the Price and Moving Average generates buying and selling points
Simple Moving Average On Nifty Spot. 200 Day M.A Buy

Buy
Sell Sale Sell Buy Buy Sale Buy Buy

Crossover between the two Moving Average indicates trend reversal

Simple Moving Average On Nifty Spot
10 days M.A

50 days M.A

Buy Sell Buy

Market Breadth
Technique used in technical analysis that attempts to gauge the direction of the overall market by analyzing the number of companies advancing relative to the number declining. Positive market breadth occurs when more companies are moving higher than are moving lower.

Advance/Decline Line (A/D)

If the markets are up but the A/D line is sloping downwards, it's usually a sign that the markets are losing their breadth and may be setting up to head in the other direction. If the slope of the A/D line is up and the market is trending upward then the market is said to be healthy.

Momentum
Momentum measures the amount that a securitys price has changed over a given time span. Momentum indicator can be used as a trend-following oscillator, Buy when the indicator bottoms and turns up and sell when the indicator peaks and turns down. Momentum indicator can be as a leading indicator. It assumes that market tops are typically identified by a rapid price increase and that market bottoms typically end with rapid price declines.

Relative Strength Index

RSI comparer's the internal strength of a single security. It is a pricefollowing oscillator that ranges between 0 and 100. The RSI usually tops above 80 and bottoms below 20.

Rate Of Change
This indicator plots positive values above the zero line and negative below. A positive value suggests there is enough market support to continue driving price activity in the direction of the current trend. A negative value suggests there is a lack of support and that prices may begin to become stagnant or reverse.

Moving Average Convergence Divergence (MACD)

When the MACD falls below the signal line, it is a bearish signal, When the MACD rises above the signal line, the indicator gives a bullish signal, When the security price diverges from the MACD. It signals the end of the current trend.

Stochastic Oscillator
Transaction signals occur when the %K crosses through a three-period moving average called the "%D". It usually tops above 80 and bottoms below 20.

Elliott Wave Theory

Elliott Wave Theory interprets market actions in terms of recurrent price structures. Basically, Market cycles are composed of two major types of Wave : Impulse Wave and Corrective Wave. For every impulse wave, it can be subdivided into 5 - wave structure (1-2-3-4-5), while for corrective wave, it can be sub-divided into 3 - wave structures (a-bc).

Waves within Wave

An important feature of Elliott Wave is that they are fractal in nature. 'Fractal' means market structure are built from similar patterns on a larger or smaller scales. Therefore, we can count the wave on a long-term yearly market chart as well as short-term hourly market chart.

Rules for Wave Count

Wave 2 should not break below the beginning of Wave 1; Wave 3 should not be the shortest wave among Wave 1, 3 and 5; Wave 4 should not overlap with Wave 1, except for wave 1, 5, a or c of a higher degree. Rule of Alternation : Wave 2 and 4 should unfold in two different wave forms.

Wave forms in Impulse Wave

(a) Extended Wave

****Among Wave 1, 3 and 5, only one should unfolded into extended wave.

(b) Diagonal Triangle at Wave 5 (c) 5th Wave Failure

(b)

(c)

Wave Forms in Corrective Wave

Gann Theory
Gann Theory is a theory on stock price movements that provides a basis for technical analysis. The six basic tenets of Gann Theory: Markets have three trends (bull, bear & sideways). Trends have three phases (major, minor and sideways). The stock market discounts all news. Stock market averages must confirm each other. Trends are confirmed by volume. Trends exist until definitive signals prove that they have ended.

Major Trend
Bull Trend Bear Trend

Minor Trend

Sideways Trend

Bull and Bear Trend

HT HT HT LB HT HB HB LB HT HB LB LT LB LT LT LT

HB
HB HT = Higher Top HB = Higher Bottom LT = Lower Top LB = Lower Bottom LB

Bull Trend

Bear Trend

Gann System
H H H

H
L L L L

Buy Signal (high is broken but low is not)

H H

Sell Signal (low is broken but high is not)

H H

L
L

L L

Inside Bar (neither high nor low is broken , continuation of previous trend )

Outside Bar (both high low is broken , continuation of previous trend)

Rules for Risk Reward Ratio (RRR) Buying

Risk : Reward = 1 : 3

Buy (Near/Close) to Previous day low. Buy ( Near/ Close) to Previous Weeks low. Buy near previous swing bottom, even if low is broken. Buy at 50% retracement of last upswing. Buy if 2 days low is same even if high is not broken. Buy if 2 weeks low is same even if high is not broken

SL 3 SL 2 SL 1

Stop loss (SL): keep trailing the SL to previous days/weeks low.

Buy
SL 2 Buy SL 1 Buy near previous Swing bottom.

50%

Buy

Buy at 50% retracement of last upswing.

Rules for RRR Selling

SL 1 Risk : Reward = 1 : 3 SL 2

Sell ( Near/ Close ) to previous day high. Sell ( Near/ Close ) to previous weeks high. Sell near previous swing top, even if high is broken. Sell at 50% retracement of last down swing. Sell if 2 days high is same even if low is not broken. Sell if 2 weeks high is same even if low is not broken

SL 3

Stop loss (SL): keep trailing the SL to previous days/weeks low.

SL 1

SL 2 SL 3

Sell Sell Sell Sell near previous swing top

SL 4

Sell
50%

Sell at 50% retracement of last down swing.