CREDENCE CAPITAL

INVESTMENT TOOLS & TECHNIQUES

July 2, 2016

AATISH | ASHISH | MOHIT | SANJAY | SUYASH | UTSAV | VISAKHA

INVESTMENT OPPORTUNITIES
Types of common investments

Cash
Cash equivalents (CDs, Treasury bills)
Bonds
Stocks
Mutual funds
Real Estate
Commodities

BASICS OF EQUITY INVESTMENTS

FUNDAMENTAL V/S TECHNICAL ANALYSIS

FUNDAMENTAL
Study the fundamentals of the company, industry &
economy to calculate intrinsic value of stock
More suitable for long term investors
Future oriented
Assumes that market movements are 90% logical
and 10% psychological

TECHNICAL
Study the past price patterns to identify trends
Suitable for short term traders & speculators
Past oriented
Assumes that market movements are 10% logical
and 90% psychological

APPROACHES TO EQUITY INVESTMENTS

Top-Down
Macro Environment
Industry Landscape
Company Outlook

Bottom-Up
Stock Picking at a Company Level
Macro just a supporting tool

TOP-DOWN APPROACH
Macro Economic Environment
Interest Rates
Inflation
Political Environment
Currency Movement
Global Economic Environment
Liquidity Situation

Industry
Cyclical / Non Cyclical
Industry Structure
Competitive Landscape
Regulatory Environment

Company
Similar parameters as bottom-up approach

BOTTOM UP APPROACH
Deep understanding about the Companys Business
How does the Company make money?
Are the earnings sustainable?
o Quality of Earnings
o Quality of Customers
Are the promoters credible ?
o Satyam, Enron

What are the risks associated withthe

business/earnings ?

VALUATION
DCF
Relative Valuation
Ratios
P/E - Relatively stable earnings
P/B - Asset heavy businesses, Banks, Erratic
earnings
EV/EBIDTA - Compare companies at an operating
level across countries
Global Comps

TRIANGULATE YOUR VALUATION

Use of more than one technique to arrive at a
valuation estimate
Stocks may look cheap on a single metric but
may be very over valued on another metric
Has to be used as a sanity check to avoid
getting swept away in the Madness of Masses
Examples:
o Internet Stocks during the 2000 Tech Boom
o Real Estate Stocks during the 2008 recession

BASICS OF
TECHNICAL ANALYSIS

INTRODUCTION
Technical analysis is the attempt to forecast stock
prices on the basis of market-derived data.
Technicians (also known as quantitative analysts or
chartists) usually look at price, volume and
psychological indicators over time.
They are looking for trends and patterns in the
data that indicate future price movements.

SUPPORT & RESISTANCE

Support and resistance lines

indicate likely ends of trends.
Breakout

Resistance results from the

inability to surpass prior highs.

Support results from the

inability to break below to
prior lows.

What was support becomes

resistance, and vice-versa.

The significance of a S or R
depends on:

how many times it has been tested

and has held
for how long it has held
Slope
chart frequency

Support

Resistance

RELIANCE CAPITAL

PRICE PATTERNS

Technicians look for many patterns in the historical

time series of prices.
These patterns are reputed to provide information
regarding the size and timing of subsequent price
moves.

Bearish Engulfing Pattern

This pattern consists of a white
small candlestick with short
shadows or tails followed by a
large black candlestick that
eclipses or engulfs the small
white one.
Bearish Engulng Pattern

CNX Nifty Chart

HEAD

AND

SHOULDERS

This formation is
characterized by two
small peaks on either
side of a larger peak.
This is a reversal
pattern, meaning that it
signifies a change inthe
trend.

H&S Top
Head

Right Shoulder

Left Shoulder

Neckline

H&S Bottom
Neckline

Left Shoulder

Right Shoulder

Head

HEAD & SHOULDERS EXAMPLE

Sell Signal

Minimum Target Price

Based on measurement rule

DOUBLE TOPS AND BOTTOMS

Double Top

These formations are

similar to the H&S
formations, but there is no
head.
Target
Target

These are reversal patterns

with the same measuring
implications as the H&S.
Double Bottom

DOUBLE BOTTOM EXAMPLE

TRIANGLES
Triangles are
continuation formations.

Ascending

Three flavors:

Symmetrical

o Ascending
o Descending
o Symmetrical

Typically, triangles
should break out about
half to three-quarters of
the way through the
formation.

Symmetrical

Descending

TECHNICAL INDICATORS
Mathematical formula applied to the
securitys price, volume or open Interest
that provide unique outlook on the
strength and direction of the underlying
price action

Used to get alert on possible trend

reversals, to confirm price trends and to
predict future target prices.
Not reliable if studied in isolation. The buy
and sell signals generated by the
indicators, should be read in context with
other technical analysis tools like
candlesticks, trends, patterns.

Moving averages
Fibonacci series
Bollinger bands
RSI

MOVING AVERAGES

MSFT Daily Prices with 10-day

MA
9/23/93to
9/21/94

60

55

50

Price

A moving average is simply the

average price (usually the
closing price) over the last N
periods.
They are used to smooth out
fluctuations of less than N
periods.
This chart shows the company
with a 10-day moving average.
Note how the moving average
shows much less volatility
than the daily stock price.

45

40

35

30
1

21

41

61

81

101

121
141
Date

161

181

201

221

241

FIBONACCI NUMBERS

Fibonacci numbers are a series where each succeeding

number is the sum of the two preceding numbers.
The first two Fibonacci numbers are defined to be 1, and
then the series continues as follows: 1, 1, 2, 3, 5, 8, 13, 21
As the numbers get larger, the ratio of adjacent numbers
approaches the Golden Mean: 1.618:1.
This ratio is found extensively in nature, and has been
used in architecture since the ancient Greeks (who believed
that a rectangle whosesides had the ratio of 1.618:1 was
the most aesthetically pleasing).
Technicalanalysts use this ratio and its inverse, 0.618,
extensively to provide projections of price moves.

RELIANCE INDUSTRIES

BOLLINGER BANDS

Bollinger bands were created by John Bollinger (former

FNN technical analyst, and regular guest on CNBC).
Bollinger Bands are based on a moving average of the
closing price.
They are two standard deviations above and below the
moving average.
A buy signal is given when the stock price closes below the lower
band, and a sell signal is given when the stock price closes above
the upper band.
When the bands contract, that is a signal that a big move is
coming, but it is impossible to say if it will be up or down.

PHARMA COMPANY

RELATIVE STRENGTH INDEX (RSI)

A technical analysis tool that is banded between

two extreme values and built with the results from a
trend indicator for discovering short term overbought and
over sold conditions.
As the value of the oscillator approach the upper
extreme value the asset can be expected to be over
brought and as it is approaches to the lower extreme it
can be e x p e c t e d to be in over sold situation.

RSI EXAMPLE CHART

Overbought

Oversold

TOO MANY OTHERS TO LIST

As noted, there are literally hundreds of indicators and

thousands of trading systems.
A whole semester could easily be spent on just a handful of
these.
To close, just note that there is nothing so crazy that
somebody doesnt use it to trade.
For example, many people use astrology, geometry (Gann
angles), neural networks, chaos theory, etc.
Theres no doubt that each of these (and others) would have made
you lots of money at one time or another. The real question is can
they do it consistently?

BOOKS AND WEBSITES TO REFER

One up on Wall Street Peter Lynch

The intelligent investor Benjamin Graham
Security Analysis Benjamin Graham
The Greatest trade ever Gregory Zuckerman
More money than God SebastianMallaby

http://www.moneycontrol.com/stocksmarketsindia/
http://www.nseindia.com/
http:// www.stockcharts.com
http://in.reuters.com/finance/markets/india-stock-market
Use ISI Emerging markets, Crisil Databases from the library
portal