ASSIGNMENT on Advanced Technical Analysis

SUBMITTED TO: Dr. K.P. Venugopala Rao

SUBMITTED By: Abhisek Sarkar (16021141002)
 1. Write a note on Elliot Theory.

In technical analysis, Elliott wave principle is a form that help finance traders to
analyze financial market cycles and forecast market trends by identifying extremes in
investor psychology, highs and lows in prices, and other collective factors. Ralph Nelson
Elliott a professional accountant, discovered this principles and developed the analytical
tools in the 1930s. He proposed that market prices unfold in specific patterns, which
practitioners today call "Elliott waves", or simply "waves".

In Elliott's model, market prices alternate between impulsive, or motive phase, and a
corrective phase on all time scales of trend. Impulses are always subdivided into a set of
5 lower-degree waves, alternating again between motive and corrective character, so that
waves 1, 3, and 5 are impulses, and waves 2 and 4 are smaller retraces of waves 1 and 3.
Corrective waves subdivide into 3 smaller-degree waves starting with a five-wave counter-
trend impulse, a retrace, and another impulse. In a bear market the dominant trend is
downward, so the pattern is reversedfive waves down and three up. Motive waves
always move with the trend, while corrective waves move against it.

Five Wave Pattern (Dominant Trend)

Wave 1: Wave 1 is obvious since its inception. When the first wave of a new bull market
begins, the fundamental news is almost universally negative. The previous trend is
considered still strongly in force. Fundamental analysts continue to revise their earnings
estimates lower, economy probably does not look strong. Volume might increase a bit as
prices rise, but not by enough to alert many technical analysts.
Wave 2: Wave 2 corrects wave 1, but can never extend beyond the starting point of wave
1. As prices retest the prior low, bearish sentiment quickly builds, and "the crowd"
haughtily reminds all that the bear market is still deeply ensconced. Here, volume should
be lower during wave two than during wave one, prices usually do not retrace more than
61.8% of the wave one gains and prices should fall in a three wave pattern.
Wave 3: Wave 3 is usually the largest and most powerful wave in a trend. If the news is
now positive and fundamental analysts start to raise earnings estimates. Prices rise
quickly, corrections are short-lived and shallow. As wave 3 starts, the news is probably
still bearish, and most market players remain negative; but by wave 3's midpoint, "the
crowd" will often join the new bullish trend. Wave three often extends wave one by a ratio
of 1.618:1.
Wave 4: Wave four is typically clearly corrective. Prices may meander sideways for an
extended period and wave 4 typically retraces less than 38.2% of wave three. Volume is
well below than that of wave three. This is a good place to buy a pull back if one
understand the potential ahead for wave 5.
Wave 5: Wave five is the final leg in the direction of the dominant trend. The news is
almost universally positive and everyone is bullish. Unfortunately, this is when many
average investors finally buy in right before the top. Volume is often lower in wave five
than in wave three, and many momentum indicators start to show divergences. At the end
of a major bull market, bears may very well be ridiculed.

Three Wave Pattern (Corrective Trend)

Wave A: Corrections are typically harder to identify than impulse moves. In wave A of a
bear market, the fundamental news is usually still positive. Most analysts see the drop as
a correction in a still-active bull market. Some technical indicators that accompany wave
A include increased volume, rising implied volatility in the options markets and possibly
a turn higher in open interest in related futures markets.
Wave B: Prices reverse higher, which many see as a resumption of the now long-gone
bull market. Those familiar with classical technical analysis may see the peak as the right
shoulder of a head and shoulders reversal pattern. The volume during wave B should be
lower than in wave A. By this point, fundamentals are probably no longer improving, but
they most likely have not yet turned negative.
Wave C: Prices move impulsively lower in five waves. Volume picks up, and by the third
leg of wave C, almost everyone realizes that a bear market is firmly entrenched. Wave C
is typically at least as large as wave A and often extends to 1.618 times wave A or beyond.
2. What are Pivot Points? Calculate the pivot points of NIFTY for 5th July 2017.

Pivot Points are a type of support and resistance levels that are used by many
intraday and short term traders. Many traders keep a watchful eye on daily pivot
points, as they are considered to be key levels at the intraday timeframe. pivot
points are calculated horizontal price levels on the chart. These levels show
potential areas where the price can reverse, especially during the first touch of
these levels. Many traders make their intraday trading decisions based on daily
pivot levels, and as such it is important for intraday traders to watch price action
at these levels closely.

Formula for Pivot Point is:

Pivot Point (PP) = (Daily High + Daily Low + Daily Close) / 3

Calculating the First Pivot Resistance and Support

R1 = (2 x Pivot Point) Daily Low
Or
R1= Daily close+ Range*1.1/12

S1 = (2 x Pivot Point) Daily High

Or
S1= Daily Close-Range*1.1/12

Calculating the Second Pivot Support and Resistance

R2 = Pivot Point + (Daily High Daily Low)
Or
R2=Daily Close+ Range*1.1/6

S2 = Pivot Point (Daily High Daily Low)

Or
S2= Daily Close- Range*1.1/6

Calculating the Third Pivot Point Support and Resistance

R3 = Daily High + 2 x (Pivot Point Daily Low)
Or
R3= Daily Close + Range* 1.1/4

S3 = Daily Low 2 x (Daily High Pivot Point)

Or
S3= Daily Close- Range * 1.1/4
 Calculating the Fourth Pivot Point Support and Resistance

R4= Daily Close + Range*1.1/2

S4= Daily Close - Range*1.1/2

NIFTY

Open- 9,619.75 High- 9,643.65 Low- 9,607.35 Close- 9641.20

Pivot Points (PP) = 9630.73

R1= 9654.12

R2= 9667.03

R3= 9690.41

R4= 9661.16

S1= 9594.65

S2=9594.43

S3= 9581.51

S4= 9621.35
 3. Discuss any 3 reversal pattern and identify them in Indian Markets.

Double Top Reversal Pattern

The 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. The first stage of this pattern is the creation of a new high during
the upward trend, which, after peaking, faces resistance and sells off to a level of support.
The next stage of this pattern will see the price start to move back towards the level of
resistance found in the previous run-up, which again sells off back to the support level.
The pattern is completed when the security falls below the support level that had
backstopped each move the security made, thus marking the beginnings of a downward
trend.
 Double Bottom Reversal Pattern

The double bottom is formed when a downtrend sets a new low in the price movement.
This downward move will find support, which prevents the security from moving lower.
Upon finding support, the security will rally to a new high, which forms the security's
resistance point. The next stage of this pattern is another sell-off that takes the security
down to the previous low. These two support tests form the two bottoms in the chart
pattern. But again, the security finds support and heads back up. The pattern is confirmed
when the price moves above the resistance the security faced on the prior move up.
Head and Shoulders Reversal Pattern

In technical analysis, a head and shoulders pattern describes a specific chart

formation that predicts a bullish-to-bearish trend reversal. The head and shoulders
pattern is believed to be one of the most reliable trend reversal patterns. It is one of several
top patterns that signal, with varying degrees of accuracy, that an upward trend is nearing
its end.