Performance of PE Ratio as an Technical Indicator

BMA Wealth Creators Ltd

BIET-MBA

CHAPTER- 1

INTRODUCTION

INTRODUCTION ABOUT THE INTERNSHIP

The experience in BMA Wealth Creators, Bangalore limited enriched the knowledge in BMA

Wealth Creators, Bangalore. Which is an Brokerage firm with various financial products like

Equities, Derivatives, research & advisory etc..

My overall experience in the company was average with the support from the company

employees and the response which I got from the management of BMA Wealth Creators,

Bangalore was overwhelming. During the first week ,we were introduced to the companies

financial products and a small introduction about stock market.

Around 12 weeks of project training in the company helped me in knowing the practical aspect

of a Brokerage firm. First 4weeks was about studying the organization mainly things like

calculating MTM and other vital calculation. It was a useful training in the company, where we

are specially trained to clear NISM Equity Derivatives Exam. We also received few assignments

for our personal understanding and gave few presentation improving our inter personal skills.

Other 8 weeks after collecting the entire necessary secondary data our external guide assisted us

for completing our project. BMA WC also assisted in opening Demate accounts for the

company. Wherein we worked as Relationship Managers and opened Demate account of others

without any sales lead. We did all job from getting a customer to filling and scanning documents.

We also went for banks for submitting checks and filled forms of the people who are opening

accounts.

Overall it was a combination of Finance, Marketing and Operational functions in BMA WC,

Bangalore. We did all jobs what an employees need to do. In free times we sat with dealers and

did Technical and Fundamental Analysis of stocks. We also tracked 5 stocks and news which

was our daily assignment.


BIET-MBA

Research Design

A research design is a systematic plan to study a scientific problem. The design of a study

defines the study type which includes descriptive, co relational, semi-experimental,

experimental, review, meta-analytic and sub-type (e.g., descriptive-longitudinal case study),

research question, hypotheses, independent and dependent variables, experimental design, and, if

applicable, data collection methods and a statistical analysis plan.

Statement Problem

Many investors and traders use PE Ratio and Expected PE ratios for the investment and trading

decision. But, we have no clear idea regarding performance of PE ratio along with other

indicators and oscillators. Even though PE Ratio is a fundamental tool many Technical Analyst

use it as a Technical Indicator.

Objective

To understand weather PE ratio is a leading or lagging indicator compared to other

indicators like RSI, stochastic and ROC

Applicability of PE ratio in Indian scripts, weather PE ratio is applicable in Indian market

scenario?

To identify the application of P/E ratio as indicator.

To identify, PE ratio is an indicator or an oscillator.

Limitations of using PE Ratio as a Technical Indicator/Tool

Scope Of The Sudy

The study helps in understanding the nature of P/E ratio as an indicator and help us in analyzing

the predictability of the indicator i.e Leading/Lagging indicator compared to other indicators like

RSI, Stochastic and ROC.


BIET-MBA

Research Methodology

Hear our research mythology is comparative research wherein we compare P/E Ratio with other

indicators and oscillator. The sample unit is the OHLC and P/E ratio which is available in NSE

website. The sample contains 2 IT stocks i.e. Wipro and TCS and 3 Benchmark Index i.e. S&P

CNX Nifty, CNX Junior Nifty, CNX IT. The research design involves 10 years of EOD data

from NSE India. Which contain around 2500 days of observation?

The data collection design

Sources of data

1. Primary data

There is no primary data needed for my project

2. Secondary data

The data like OHLC and P/E Ratio is been collected from NSE India and EPS data is

been collected from ACE equity a Historical data provider company. Annual reports of

BMA wealth from BMA Wealth creators, Journals and magazines related to my research,

the data collected from Internet of mainly intended to collect the Brochures, fact sheets

etc.

Limitation of the study

No cutting edge DSS software like Amibroker, Metastocks etc

Literature review

Name: Price–Earnings Ratios as Forecasters of Returns: The Stock Market Outlook in 1996

Author: Robert J. Shiller

Summary

The theory that the stock market is approximately a random walk does not look right at all:

Figure 1 is a (log-log) scatter diagram showing for each year 1901–1986 the ratio of the real


BIET-MBA

Standard and Poor Index ten years later to the real index today (on the y axis) versus a certain

price–earnings ratio: the ratio of the real Standard and Poor Composite Index for the first year of

the ten year interval, divided by a lagged thirty year moving average of real earnings

corresponding to the Standard and Poor Index (on the x axis). Index values are for January,

conversion of nominal values to real values is done by the January Producer Price Index. The

variable shown on the x axis is publicly known at the beginning of each ten year interval. If real

stock prices were a random walk, they should be unforecastable, and there should really be no

relation here between y and x. There certainly appears to be a distinct negative relation here. The

January 1996 value for the ratio shown on the horizontal axis is 29.72, shown on the figure with

a vertical line. Looking at the diagram, it is hard to come away without a feeling that the market

is quite likely to decline substantially in value over the succeeding ten years; it appears that long

run investors should stay out of the market for the next decade.

Is this conclusion right? How can we reconcile it with the widespread public impression that the

random walk hypothesis is at least approximately true?


BIET-MBA

CHAPTER 1

Industrial Profile

General Introduction

The economic development at any country depends upon the existence of a well-organized

financial system. It is the financial system which supplies the necessary financial inputs for the

production of goods and services which in turn promote the well-being and standard of living of

the people of a country. Thus the financial system is a broader term which brings under its fold

the financial markets and financial institutions which support the system.

The major assets traded in the financial system are money and monitory assets. The

responsibility of the financial system is to mobilize the savings in the form of money and

monetary assets and invest them to productive ventures. An efficient functioning of the financial

system facilitates the free flow of the funds to more productive activities and thus promotes

investments. Thus, the financial system provides the intermediation between savers and investors

and promotes faster economic development.

Origin Of Stock Market

India has two hundred years old tradition in Securities. In fact that first India stock

exchange established in Bombay is the oldest in Asia. Corporate Shares came into the picture by

1830‟s and assumed significance with the Companies Act of 1956. In 1887 the broker

community gave birth to the “Native share and stock brokers Association” which is now known

as the Bombay Stock Exchange.

The Indian Capital grew at a very moderate rate from 1951 to 1980. However it

registered an impressive growth in 1980‟s. The process of liberalization and the transparency in

operation has raised the interest of foreign investors in India. Till 1978 there were only 8


BIET-MBA

recognized exchanges in India. Initially the exchange operated on an outcry system i.e. manual

system of trading. Due to increase in the trading volumes, the number of issuer increased

substantially, and the birth of NSES highly transparent automated system come into existence.

National Stock Exchange of India Limited to provide electronic depository facilities for

securities traded in the equity and the debt market. NSDL commenced its operations in the year

1996 and is the first depository in India.

An important early event in the development of the stock market in India was the

formation of the native share and stock brokers 'Association at Bombay in 1875, the precursor

of the present day Bombay Stock Exchange. This was followed by the formation of

associations/exchanges in Ahmadabad (1894), Calcutta (1908), and Madras (1937). In addition, a

large number of ephemeral exchanges emerged mainly in buoyant periods to recede into oblivion

during depressing times subsequently.

Importance

The stock market is one of the most important sources for companies to raise money.

This allows businesses to be publicly traded, or raise additional capital for expansion by selling

shares of ownership of the company in a public market. The liquidity that an exchange provides

affords investors the ability to quickly and easily sell securities. This is an attractive feature of

investing in stocks, compared to other less liquid investments such as real estate. Rising share

prices, for instance, tend to be associated with increased business investment and vice versa.

Share prices also affect the wealth of households and their consumption.

Role Of Stock Exchange

Stock exchanges have multiple roles in the economy. This may include the following

RAISING CAPITAL FOR BUSINESS:

The Stock Exchange provides companies with the facility to raise capital for expansion

through selling shares to the investing public.


BIET-MBA

MOBILISING SAVINGS FOR INVESTMENT:

When people draw their savings and invest in shares, it leads to a more rational allocation of

resources because funds, which could have been consumed, or kept in idle deposits with banks,

are mobilized and redirected to promote business activity with benefits for several economic

sectors such as agriculture, commerce and industry, resulting in stronger economic growth and

higher productivity levels of firms.

FACILITATING COMPANY GROWTH:

Companies view acquisitions as an opportunity to expand product lines, increase distribution

channels, hedge against volatility, increase its market share, or acquire other necessary

business assets. A takeover bid or a merger agreement through the stock market is one of the

simplest and most common ways for a company to grow by acquisition or fusion.

CORPORATE GOVERNANCE:

By having a wide and varied scope of owners, companies generally tend to

improve management standards and efficiency to satisfy the demands of these shareholders, and

the more stringent rules for public corporations imposed by public stock exchanges and the

government. Consequently, it is alleged that public companies (companies that are owned by

shareholders who are members of the general public and trade shares on public exchanges) tend

to have better management records than privately held companies (those companies where shares

are not publicly traded, often owned by the company founders and/or their families and heirs, or

otherwise by a small group of investors).

CREATING INVESTMENT OPPORTUNITIES FOR SMALL INVESTORS:

As opposed to other businesses that require huge capital outlay, investing in shares is open to

both the large and small stock investors because a person buys the number of shares they can

afford. Therefore the Stock Exchange provides the opportunity for small investors to own shares

of the same companies as large investors.

GOVERNMENT CAPITAL RISING FOR DEVELOPMENT PROJECTS:


BIET-MBA

Governments at various levels may decide to borrow money to finance infrastructure projects

such as sewage and water treatment works or housing estates by selling another category

of securities known as bonds. These bonds can be raised through the Stock Exchange whereby

members of the public buy them, thus loaning money to the government. The issuance of such

bonds can obviate the need, in the short term, to directly tax citizens to finance development

though by securing such bonds with the full faith and credit of the government instead of with

collateral, the government must eventually tax citizens or otherwise raise additional funds to

make any regular coupon payments and refund the principal when the bonds mature.

BAROMETER OF THE COMPANY:

At the stock exchange, share prices rise and fall depending, largely, on market forces. Share

prices tend to rise or remain stable when companies and the economy in general show signs of

stability and growth. An economic recession, depression, or financial crisis could eventually lead

to a stock market crash. Therefore the movement of share prices and in general of the stock

indexes can be an indicator of the general trend in the economy.


BIET-MBA

BSE (BOMBAY STOCK EXCHANGE)

For the premier Stock Exchange that pioneered the stock broking activity in India, 128

years of experience seems to be a proud milestone. A lot has changed since 1875 when 318

persons became members of what today is called "The Stock Exchange, Mumbai" by paying a

princely amount of Re1.Since then, the country's capital markets have passed through both good

and bad periods. The journey in the 20th century has not been an easy one. Till the decade of

eighties, there was no scale to measure the ups and downs in the Indian stock market.

The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that

subsequently became the barometer of the Indian stock market. SENSEX is not only

scientifically designed but also based on globally accepted construction and review

methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing

a sample of large, liquid and representative companies.

The base year of SENSEX is 1978-79 and the base value is 100. The index is widely

reported in both domestic and international markets through print as well as electronic media.

The Index was initially calculated based on the "Full Market Capitalization" methodology but

was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float

Market Capitalization" methodology of index construction is regarded as an industry best

practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use

the Free-float methodology.

http://upload.wikimedia.org/wikipedia/commons/f/f3/Bombay_Stock_Exchange_logo.svg


BIET-MBA

NSE (NATIONAL STOCK EXCHANGE)

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which recommended

promotion of a National Stock Exchange by financial institutions (FIs) to provide access to

investors from all across the country on an equal footing. Based on the recommendations, NSE

was promoted by leading Financial Institutions at the behest of the Government of India and was

incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the

country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,

1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment

in June 1994. The Capital Market (Equities) segment commenced operations in November 1994

and operations in Derivatives segment commenced in June 2000.

NIFTY:

The Nifty is relatively a new comer in the Indian market. S&P CNX Nifty is a 50 stock

index accounting for 23 sectors of the economy. It is used for purposes such as benchmarking

fund portfolios; index based derivatives and index funds. The base period selected for Nifty is

the close of prices on November 3, 1995, which marked the completion of one-year of operations

of NSE's capital market segment. The base value of index was set at 1000.

S&P CNX Nifty is owned and managed by India Index Services and Products

Ltd. (IISL), which is a joint venture between NSE and CRISIL. IISL is a specialized

company focused upon the index as a core product. IISL have a consulting and

licensing agreement with Standard & Poor's (S&P), who are world leaders in index

services.

CHAPTER 2

http://upload.wikimedia.org/wikipedia/en/6/6d/National_Stock_Exchange_of_India_Logo.svg


BIET-MBA

COMPANY PROFILE

Background of the company

A financial services provider, BMA Wealth Creators specializes in extending customized

financial solutions to individual and corporates. The Company works towards understanding the

financial ambitions of its clients and adjusts to its risk profile accordingly. Its expertise combined

with thorough understanding of the financial markets results in appropriate investment solutions

for all.

The BMA Group has created its forte by promoting successful ventures in the

fields of coal mining, refractory, steel and Ferro alloy. Its continuous strive to

achieve excellence and growth keeps it abreast of the latest in technology and

best business practices, thereby making it customer oriented while forging alliances,

high quality standards and proactive business cultures.

BMA Wealth Creators, realize the dreams, needs, aspirations and concerns of

our clients as closely as they do. This is reflected in every move they make with and for

them because their relationship with their Clients is of superior importance to them.

http://www.bmawc.com/Default.aspx


BIET-MBA

The company‟s Competitive Strength lies in its people who put in record an unfaltering

track of growth and profit.

BMA PROMOTORS

The Company is managed by a team of highly qualified and experienced professionals from the

finance industry across the country. They are:

ANUBHAV BHATTER, Chairman & Managing Director

As the Chairman & Managing Director, Mr Anubhav Bhatter is the guiding force of the

Company. A graduate in Commerce from St Xaviers College, Kolkata and a Chartered Financial

Planner, Mr Anubhav Bhatter founded one of the leading financial services company in India,

BMA Wealth Creators Limited. With over nine years of financial experience, he has set new

standards and established niche operations to bring BMA Wealth Creators Limited to a position

that it has reached today.

Prior to founding BMA Wealth Creators Limited, Mr Bhatter worked with SKP Securities as

Head, Products.

SAIKAT GANGULY, Chief Executive Officer

With over fifteen years of financial market experience, Saikat Ganguly‟s knowledge of the

industry is comprehensive. He has held several top managerial positions in various organizations

including Reliance Money before he joined BMA Wealth Creators Limited in the year 2009 as

its Chief Executive Officer.

Ever since, he has led BMA Wealth Creators Limited in handling several niche Sales,

Distribution and Product Management initiatives. He has been instrumental in setting the pan

India foot print of the organization by setting up Branches and distribution network in every

nook and corner of the country. He even plays a key role in promoting investor education with

initiatives such the CNBC Awaaz Money Yatra. His extensive knowledge, along with his


BIET-MBA

leadership skills has helped BMAWC position itself as one of the top financial services houses in

the country.

AVINASH AGARWALLA, Director

A commerce graduate from St Xaviers College, Kolkata and an MBA from Xavier Institute of

Management, Bhubaneshwar, Mr Avinash Agarwalla is the voice of knowledge on the Board of

Directors of the Company. With over eleven years of extensive market experience in Financial as

well as the Product Manufacturing industry, Mr Avinash Agarwal has given shape to the growth

of BMA Wealth Creators Limited. With an extensive knowledge of the nuances involved in the

financial sector and a strong foot hold over the market, the entire Group looks up to his

contribution.

SHIV KUMAR DAMANI,Director

Experience is the greatest education. And we know it when we meet

Mr Damani. With a financial career spanning over twenty two years, Mr Damani is

Director, BMA Wealth Creators Limited. He has been associated with the Company since

its inception and ever since, has nurtured the growth and operation of the Company just as a

parent would do for its child.

A Bachelor in Commerce from the University of Calcutta, Mr Damani has studied the

financial market from close quarters to manage the risks involved while working towards

the benefit of the Company and the people it is associated with, thus progressively stepping

up the operational quality of the organization Prior to joining BMA Wealth Creators

Limited, he worked with SKP Securities Limited.


BIET-MBA

Vision & Mission

Vision

India Post's products and services will be the customer's first choice.

To provide integrated financial service building investor wealth and confidence

Mission

To sustain its position as the largest postal network in the world touching the lives of every

citizen in the country.

To provide mail parcel, money transfer, banking, insurance and retail services with speed and

reliability.

To provide services to the customers on value-for-money basis.

To ensure that the employees are proud to be its main strength and serve its customers with a

human touch.

To continue to deliver social security services and to enable last mile connectivity as a

Government of India platform.

To be a premier financial supermarket providing integrated investment services.


BIET-MBA

Awards and Recognitions

Reliance Life Insurance Awards - RISING STAR

Tasting success at the Reliance Life Insurance Awards held in Italy, BMA Wealth Creators

has bagged an Award in the Rising Star Category, Third Party Distribution. The Award was

handed over to Anubhav Bhatter, CEO & MD, BMA Wealth Creators and Saikat Ganguly,

COO, BMA Wealth Creators by Sam Ghosh, Group President and CEO, Reliance Capital,

Malay Ghosh, CEO, Reliance Life Insurance and Jatin Sabhani, Vice President and Head,

Third Party Distribution, Reliance Life Insurance.


BIET-MBA

MARKETS IN WHICH BMA DEALS:

EQUITY & DERIVATIVES

Equity and derivatives go hand in hand as they help maximize return and minimize risk at the

same time! BMA Wealth Creators Ltd clients are assisted in protecting the downside risk to their

portfolio using appropriate combination of options. Our advisory is skilled to help you in

maximizing your gains from your existing corpus using numerous strategies based on the

direction and intensity of the views. BMAWC Ltd ensures that you get the one of the finest

trading experiences through:

An experienced and qualified team of Equity professionals offering unbiased advice on

equity investment decisions.

All members having immense experience and each of them being professionally certified

by the National Stock Exchange.

A high level of personalized and confidential service.

Constant monitoring of client portfolio so that the returns are maximized and the risks are

minimized

Secure, integrated broking system

Powerful Research & Analytics

COMMODITIES

Commodities are now an asset class! For those who want to diversify their portfolios beyond

shares, bonds and real estate, commodities are an excellent option. Commodities are one of the

easiest investment avenues to understand as they are based on the fundamentals of demand and

supply. Historically, prices in commodities futures have been less volatile compared with equity

and bonds, thus providing an efficient portfolio diversification option.


BIET-MBA

DEPOSITORY

BMAWC Ltd is a depository participant with Central Depository Services (India) Limited

(CDSL) and uses the latest in technology to deliver DP Services in a hassle free, secure and

transparent environment.

Depository Services provided by Ventura Securities Ltd include:

Account Opening

Dematerialization

Rematerialisation

Account Transfer

Nominatio

INVESTMENT ADVISORY

BMAWC Ltd has a dedicated team of professionals handling the investment advisory services of

the firm. These experts use their knowledge of investments, tax laws, and insurance to

recommend financial options to clients in accordance with their short-term and long-term goals.

Some of the issues that the specialists address are general investments, retirement planning, tax

planning and child education & welfare planning. Our certified Investment Advisory Managers

strive to understand each individual client‟s needs, risk profiles and investment goals to provide

the best advice. Apart from advising, they help clients build and track their investments. They

also regularly monitor report and recommend changes based on the performance of the portfolio.

We offer advice on and help invest in the following products:

Mutual Funds

Insurance - Life & Non - Life

Bonds

Deposits

IPO‟s

Small Savings Instruments


BIET-MBA

COMPITATORS

Kotak Securities Limited

Originally established in 1994, Kotak Securities is a subsidiary of Kotak Mahindra Bank,

which services more than 14 lakh customer accounts. The firm has a wide network of more than

1,255 branches, franchisees representative offices, and satellite offices across 386 cities in India

and offices in New York, London, Dubai, Mauritius and Singapore.

We process more than 400000 trades a day which is much higher than some of the renowned

international brokers.

The company is a corporate member of both The Bombay Stock Exchange (BSE) and The

National Stock Exchange of India (NSE). Our operations include stock broking services for

trading in stock markets through branches & internet and distribution of various financial

products including investments in IPOs, Mutual Funds and Currency Derivatives. Currently,

Kotak Securities is one of the largest broking houses in India with substantial geographical reach

to Asia Pacific, Europe, Middle East and America.

KARVY Stock Broking Limited

KARVY Stock Broking Limited, one of the cornerstones of the KARVY edifice, flows

freely towards attaining diverse goals of the customer through varied services. It creates a

plethora of opportunities for the customer by opening up investment vistas backed by research-

based advisory services. Here, growth knows no limits and success recognizes no boundaries.

Helping the customer create waves in his portfolio and empowering the investor completely is

the ultimate goal. KARVY Stock Broking Limited is a member of: 1) National Stock Exchange

(NSE) , 2) Bombay Stock Exchange (BSE), 3) MCX Stock Exchange(MCX-SX).


BIET-MBA

INDIABULLS

Indiabulls is an Indian company headquartered in Gurgaon, with presence in the real estate,

infrastructure, financial services, securities, retail, multiplex and power sectors.

IL&FS Investment Managers

IL&FS Investment Managers, a subsidiary of Infrastructure Leasing & Financial Services

(IL&FS), is one of the oldest and largest private equity fund managers in India, with over $1.9 bn

under management.

Established in 1989, IIML has been an early and in many instances, the first investor across

various sectors such as Telecom, City Gas Distribution, Shipyards, Retail, and Media. Funds

managed by IIML now span General Purpose Private Equity, Real Estate and Infrastructure.

Investors to IIML managed funds include most of the major Indian banks & institutions, and

marquee global institutional Investors including major US pension funds, endowments and

foundations.IIML is listed on the National Stock Exchange and the Bombay Stock Exchange.

The origins of IIML date back to 1989 when it was founded as Credit Capital Venture Fund

(India) Limited (CCVF), an affiliate of Lazard Brothers. CCVF was the first private sector

venture capital company in India, and managed a number of small sector focused funds apart

from investing its own proprietary capital.

Motilal Oswal Securities Ltd.

Motilal Oswal Securities Ltd. (MOSL) was founded in 1987 as a small sub-broking unit. Today,

MOSL is a well diversified financial services firm offering a range of financial products and

services such as Wealth Management, Broking & Distribution, Commodity Broking, Portfolio

Management Services, Institutional Equities, Private Equity, Investment Banking Services and

Principal Strategies. And become one of the competitor for BMAWC Ltd.


BIET-MBA

Reliance Securities

Reliance Securities, the broking arm of Reliance Capital is the one of the India‟s leading retail

broking houses in India, providing customers with access to equities, equity options and

commodities futures, wealth management, wealth management services, mutual funds, IPOs and

investment banking.

Reliance Money

The third party distribution business of Reliance Capital, branded as „Reliance Money‟ is a

comprehensive financial services and solutions provider, providing customers with access to life

and general Insurance products, money transfer, currency exchange and loans

Structure:

A company‟s structure affects its strategic planning and its ability to change. A

company‟s structure may have a customer or geographical focus. It contains the salient features

of the organizational chart and interconnections within the organization.

Here the organization structure is straight line structure where the company employee goes

and report to his head or team leader where he go and communicates with his superior. Here the

communication is from both the side i.e.., from upward to downward & downward to upward.

By this the management is able to handle the employees with effectively and efficiently. Thus

the company has formed its structure so that it is beneficial to the employees as well as the

company and also has a good communication process.

ORGANISATION STRUCTURE OF JRG SECURITIES


BIET-MBA

Strategy:

Strategy refers to those actions that a company plans in response to or in anticipation of

changes in its external environment, its customer and its competitor. It is plan of action or course

of action leading to the allocation of an organization‟s finite resources to reach identified goal.

BOARD OF DIRECTORS

CEO

COO and

Head

complianc

e

Group

head HR

MD&CFO

Head

commodity

or Forex

Head IT Head

Operation

Product

and head

equity

Head

financial

planning

Head

sales

Risk

management

Compliance

Corporate

HR

Regional

HR

Training Head office

operation

& ERP

Franchisees

channel

Branch

channel

Legal and

secretarial

Zonal head

Franchises

or premises

State head

Dealers

Regional

managers


BIET-MBA

Our business plan is to become leading investment advisor and intermediary for financial

services in India. The key driver is to increase our customer base in all our products give them a

platform of choice to transact and support them with quality research. The elements of our

strategy include:

“One stop shop” from advice to transactions.

Multi channel delivery model.

Expansion of retail network.

Continuous investment in technology platform.

System: Open system

The procedures both formal and informal, by which an organization operates and gathers

information constitutes the system of the company. This model is concerned with the systems

that allocate the control money and materials as well as gather information.

Here the company follows the system of “Team leadership”, the management gives the

authority for the team leader and carries on the work under their guidance and several team

leaders are linked to one manager or the supervisor person. Other these the other systems of the

company are- Managing/sharing customer information, Unified reporting of digital market

effectiveness, Campaign planning approach-integration.

Skill: Interpersonal skill

The skill is closely related to staff are the distinctive abilities and talents that a company

possess. Skills may range from ability of a staff to speak different languages to understanding of

the statistics to compute literacy etc.

The company has the good facilitators, and also the company personnel are capable to

ask the right question to draw solutions out of other, they ask stimulating questions in a

supportive manner than behaving like a police interrogator. They use their planning skills to

prioritize in combination with the ability to understand how value is created. This means

understanding the financial aspects of running an organization and allocating all resources at

their disposal wisely. They are identifying and cultivating professionals to provide capable


BIET-MBA

management, and in the process they are ensuring that the leadership vision is supported through

execution to achieve business results.

Style: Organizational culture

The Culture or Style is the aggregate behaviors, thoughts, beliefs and symbols that are

conveyed to the people throughout the organization over time. Since it is very hard to change a

company‟s ingrained culture, it is important to bear in mind when developing the new strategy.

They have developed a team of Customer Relationship Managers across India to handle

key customer accounts. These people are experienced in financial services and have undergone

in-house training. This allows them to offer unbiased advice on not only equities but also on

other investment products like mutual funds ensure that the customer has a single point of

contact with the company.

Staff: Knowledge staff

Staff means the human resource systems which include appraisal, training, wages and

the intangibles such as employee motivation, morale and attitude. With a motivation workforce

companies are able to adopt well and compete.

Their Human Resource Policy on the philosophy of “Owner Mindset”. They believe

that the key to their continued growth lied in unleashing the entrepreneurial energy of their

employees. They encourage all employees to behave more as owners of their departments rather

than employees. Their people are highly driven and work towards increasing JRG Securities

brand and share across product lines.

Shared values:


BIET-MBA

Values are important part of company‟s organization culture. In fact its tagline depicts

how much emphasis it lays on core values. The core values are,

Honesty

Integrity

Respect

Fairness

Purposefulness

Trust

Responsibility

Citizenship

Caring.


BIET-MBA

SWOT ANALYSIS

A SWOT analysis focuses on the internal and external environments, 3examining strengths and

weaknesses in the internal environment and opportunities and threats in the external

environment.

STRENGTHS:

Strengths:

• Experience of more than decades of trust and credibility in the Indian stock market.

• 2800+ business outlets across India.

• Deep understanding of Indian mid market corporate clients.

• Dedicated research team for technical and fundamental analysis.


BIET-MBA

•

WEAKNESS

• Highly risk oriented business.

• Slight entry level of investors.

• Lacks in advertising.

Unlike some of its competitors like ICICI and Kotak, does not provide a complete catalogue of

financial services (e.g. banking facility

OPPORTUNITIES

• BMA is registered with Luxembourg stock exchange and so can target other stock

exchanges

• Strong momentum in franchise in the last two years.

• BMA has tied up with other third party companies to sell their products.

• Market expansion i.e. opening branches at untapped areas, mostly in north India.

THREATS

• Unexpected changes in the capital market such as rules and regulations etc.

• Increasing competition in the industry.

• Fast changing in technology.


BIET-MBA

Chapter 3

Technical analysts use indicators to look into a different perspective from which stock prices

can be analyzed. Technical indicators provide unique outlook on the strength and direction of the

underlying price action for a given timeframe.

Indicators

Technical Indicators broadly serve three functions: to alert, to confirm and to predict. Indicator

acts as an alert to study price action, sometimes it also gives a signal to watch for a break of

support. A large positive divergence can act as an alert to watch for a resistance breakout.

Indicators can be used to confirm other technical analysis tools. Some investors and traders

use indicators to predict the direction of future prices.

Tips for using indicators

Types of indicators

Indicators can broadly be divided into two types “LEADING” and “LAGGING”.

Leading indicators

Leading indicators are designed to lead price movements. Benefi ts of leading indicators are

early signaling for entry and exit, generating more signals and allow more opportunities to

trade. They represent a form of price momentum over a fi xed look-back period, which is

the number of periods used to calculate the indicator. Some of the wellmore popular leading

indicators include Commodity Channel Index (CCI), Momentum, Relative Strength Index

(RSI), Stochastic Oscillator and Williams %R.

Lagging Indicators

Lagging Indicators are the indicators that would follow a trend rather then predicting a

reversal. A lagging indicator follows an event. These indicators work well when prices move


BIET-MBA

in relatively long trends. They don‟t warn you of upcoming changes in prices, they simply tell

you what prices are doing (i.e., rising or falling) so that you can invest accordingly. These trend

following indicators makes you buy and sell late and, in exchange for missing the early

opportunities, they greatly reduce your risk by keeping you on the right side of the market.

Moving averages and the MACD are examples of trend following, or “lagging,” indicators.

81

What is momentum?

Momentum is simply the rate of change – the speed or slope at which a stock or commodity

ascends or declines. Measuring speed is a useful gage of impending change. For example,

assume that you were riding in a friends‟ car, not looking at what was happening ahead

but instead just at the speedometer. You can see when the car starts to slow down and if it

continues to do so you can reasonably assume it‟s going to stop very shortly. You may not

know the reason for it coming to a stop…it could be the end of the journey, approaching and

intersection or because the road is a little rougher ahead. In this manner watching the speed

provides a guide for what may happen in the future.

An oscillator is an indicator that moves back and forth across a reference line or between

prescribed upper and lower limits. When an oscillator reaches a new high, it shows that an

uptrend is gaining speed and is likely to continue. When an oscillator traces a lower peak, it

means that the trend has stopped accelerating and a reversal can be expected from there,

much like a car slowing down to make a U-Turn.

In the same way watching a stock for impending momentum change can provide a glimpse of

what may happen in the future – momentum oscillators, such as RSI are referred to as trend

leading indicators.


BIET-MBA

RSI

Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that

measures the speed and change of price movements. RSI oscillates between zero and 100.

Traditionally, and according to Wilder, RSI is considered overbought when above 70 and

oversold when below 30. Signals can also be generated by looking for divergences, failure

swings and centerline crossovers. RSI can also be used to identify the general trend.

RSI is an extremely popular momentum indicator that has been featured in a number of articles,

interviews and books over the years. In particular, Constance Brown's book, Technical Analysis

for the Trading Professional, features the concept of bull market and bear market ranges for RSI.

Andrew Cardwell, Brown's RSI mentor, introduced positive and negative reversals for RSI. In

addition, Cardwell turned the notion of divergence, literally and figuratively, on its head.

Calculation Formula

To simplify the calculation explanation, RSI has been broken down into its basic

components: RS, Average Gain and Average Loss. This RSI calculation is based on 14 periods,

which is the default suggested by Wilder in his book. Losses are expressed as positive values, not

negative values.

The very first calculations for average gain and average loss are simple 14 period averages.

First Average Gain = Sum of Gains over the past 14 periods / 14.

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_technical_indicators_and_oscillators


BIET-MBA

First Average Loss = Sum of Losses over the past 14 periods / 14

The second, and subsequent, calculations are based on the prior averages and the current gain

loss:

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

Taking the prior value plus the current value is a smoothing technique similar to that used in

exponential moving average calculation. This also means that RSI values become more accurate

as the calculation period extends. SharpCharts uses at least 250 data points prior to the starting

date of any chart (assuming that much data exists) when calculating its RSI values. To exactly

replicate our RSI numbers, a formula will need at least 250 data points.

Wilder's formula normalizes RS and turns it into an oscillator that fluctuates between zero and

100. In fact, a plot of RS looks exactly the same as a plot of RSI. The normalization step makes

it easier to identify extremes because RSI is range bound. RSI is 0 when the Average Gain equals

zero. Assuming a 14-period RSI, a zero RSI value means prices moved lower all 14 periods.

There were no gains to measure. RSI is 100 when the Average Loss equals zero. This means

prices moved higher all 14 periods. There were no losses to measure.


BIET-MBA

Note: The smoothing process affects RSI values. RS values are smoothed after the first

calculation. Average Loss equals the sum of the losses divided by 14 for the first calculation.

Subsequent calculations multiply the prior value by 13, add the most recent value and then divide

the total by 14. This creates a smoothing affect. The same applies to Average Gain. Because of

this smoothing, RSI values may differ based on the total calculation period. 250 periods will

allow for more smoothing than 30 periods and this will slightly affect RSI values.

Stockcharts.com goes back 250-days when possible. If Average Loss equals zero, a “divide by


BIET-MBA

zero” situation occurs for RS and RSI is set to 100 by definition. Similarly, RSI equals 0 when

Average Gain equals zero.

Parameters

The default look-back period for RSI is 14, but this can be lowered to increase sensitivity or

raised to decrease sensitivity. 10-day RSI is more likely to reach overbought or oversold levels

than 20-day RSI. The look-back parameters also depend on a security's volatility. 14-day RSI for

internet retailer Amazon (AMZN) is more likely to become overbought or oversold than 14-day

RSI for Duke Energy (DUK), a utility.

RSI is considered overbought when above 70 and oversold when below 30. These traditional

levels can also be adjusted to better fit the security or analytical requirements. Raising

overbought to 80 or lowering oversold to 20 will reduce the number of overbought/oversold

readings. Short-term traders sometimes use 2-period RSI to look for overbought readings above

80 and oversold readings below 20.

Overbought-Oversold

Wilder considered RSI overbought above 70 and oversold below 30. Chart 3 shows McDonalds

with 14-day RSI. This chart features daily bars in gray with a 1-day SMA in pink to highlight

closing prices because RSI is based on closing prices. Working from left to right, the stock

became oversold in late July and found support around 44 (1). Notice that the

bottom evolved after the oversold reading. The stock did not bottom as soon as the oversold

reading appeared. Bottoming can be a process. From oversold levels, RSI moved above 70 in

mid September to become overbought. Despite this overbought reading, the stock did not

decline. Instead, the stock stalled for a couple weeks and then continued higher. Three more

overbought readings occurred before the stock finally peaked in December (2). Momentum

oscillators can become overbought (oversold) and remain so in a strong up (down) trend. The

first three overbought readings foreshadowed consolidations. The fourth coincided with a

significant peak. RSI then moved from overbought to oversold in January. The final bottom did

not coincide with the initial oversold reading as the stock ultimately bottomed a few weeks later

around 46 (3).

http://stockcharts.com/school/doku.php?id=chart_school:glossary_o#overbought

http://stockcharts.com/school/doku.php?id=chart_school:glossary_o#oversold


BIET-MBA

Like many momentum oscillators, overbought and oversold readings for RSI work best when

prices move sideways within a range. Chart 4 shows MEMC Electronics (WFR) trading between

13.5 and 21 from April to September 2009. The stock peaked soon after RSI reached 70 and

bottomed soon after the stock reached 30.

Divergences

According to Wilder, divergences signal a potential reversal point because directional

momentum does not confirm price. A bullish divergence occurs when the underlying security


BIET-MBA

makes a lower low and RSI forms a higher low. RSI does not confirm the lower low and this

shows strengthening momentum. A bearish divergence forms when the security records a higher

high and RSI forms a lower high. RSI does not confirm the new high and this shows weakening

momentum. Chart 5 shows Ebay (EBAY) with a bearish divergence in August-October. The

stock moved to new highs in September-October, but RSI formed lower highs for the bearish

divergence. The subsequent breakdown in mid October confirmed weakening momentum.

A bullish divergence formed in January-March. The bullish divergence formed with Ebay

moving to new lows in March and RSI holding above its prior low. RSI reflected less downside

momentum during the February-March decline. The mid March breakout confirmed improving

momentum. Divergences tend to be more robust when they form after an overbought or oversold

reading.

Before getting too excited about divergences as great trading signals, it must be noted that

divergences are misleading in a strong trend. A strong uptrend can show numerous bearish

divergences before a top actually materializes. Conversely, bullish divergences can appear in a

strong downtrend - and yet the downtrend continues. Chart 6 shows the S&P 500 ETF (SPY)

with three bearish divergences and a continuing uptrend. These bearish divergences may have

warned of a short-term pullback, but there was clearly no major trend reversal.


BIET-MBA

Failure Swings

Wilder also considered failure swings as strong indications of an impending reversal. Failure

swings are independent of price action. In other words, failure swings focus solely on RSI for

signals and ignore the concept of divergences. A bullish failure swing forms when RSI moves

below 30 (oversold), bounces above 30, pulls back, holds above 30 and then breaks its prior

high. It is basically a move to oversold levels and then a higher low above oversold levels. Chart

7 shows Research in Motion (RIMM) with 10-day RSI forming a bullish failure swing.


BIET-MBA

A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed 70

and then breaks its prior low. It is basically a move to overbought levels and then a lower high

below overbought levels. Chart 8 shows Texas Instruments (TXN) with a bearish failure swing

in May-June 2008.

Trend ID

In Technical Analysis for the Trading Professional, Constance Brown suggests that oscillators do

not travel between 0 and 100. This also happens to be the name of the first chapter. Brown

identifies a bull market range and a bear market for RSI. RSI tends to fluctuate between 40 and

90 in a bull market (uptrend) with the 40-50 zones acting as support. These ranges may vary

depending on RSI parameters, strength of trend and volatility of the underlying security. Chart 9

shows 14-week RSI for SPY during the bull market from 2003 until 2007. RSI surged above 70

in late 2003 and then moved into its bull market range (40-90). There was one overshoot below

40 in July 2004, but RSI held the 40-50 zone at least five times from January 2005 until October


BIET-MBA

2007 (green arrows). In fact, notice that pullbacks to this zone provided low risk entry points to

participate in the uptrend.

n the flip side, RSI tends to fluctuate between 10 and 60 in a bear market (downtrend) with the

50-60 zone acting as resistance. Chart 10 shows 14-day RSI for the US Dollar Index ($USD)

during its 2009 downtrend. RSI moved to 30 in March to signal the start of a bear range. The 40-

50 zone subsequently marked resistance until a breakout in December.


BIET-MBA

Positive-Negative Reversals

Andrew Cardwell developed positive and negative reversals for RSI, which are the opposite of

bearish and bullish divergences. Cardwell's books are out of print, but he does offer seminars

detailing these methods. Constance Brown credits Andrew Cardwell for her RSI enlightenment.

Before discussing the reversal technique, it should be noted that Cardwell's interpretation of

divergences differs from Wilder. Cardwell considered bearish divergences as bull market

phenomenon. In other words, bearish divergences are more likely to form in uptrends. Similarly,

bullish divergences are considered bear market phenomenon indicative of a downtrend.

A positive reversal forms when RSI forges a lower low and the security forms a higher low. This

lower low is not at oversold levels, but usually somewhere between 30 and 50. Chart 11 shows

MMM with a positive reversal forming in June 2009. MMM broke resistance a few weeks later

and RSI moved above 70. Despite weaker momentum with a lower low in RSI, MMM held

above its prior low and showed underlying strength. In essence, price action overruled

momentum.


BIET-MBA

A negative reversal is the opposite of a positive reversal. RSI forms a higher high, but the

security forms a lower high. Again, the higher high is usually just below overbought levels in the

50-70 area. Chart 12 shows Starbucks (SBUX) forming a lower high as RSI forms a higher high.

Even though RSI forged a new high and momentum was strong, the price action failed to

confirm as lower high formed. This negative reversal foreshadowed the big support break in late

June and sharp decline.


BIET-MBA

RSI Oversold in Uptrend: This scan reveals stocks that are in an uptrend with oversold RSI.

First, stocks must be above their 200-day moving average to be in an overall uptrend. Second,

RSI must cross below 30 to become oversold.

RSI Overbought in Downtrend: This scan reveals stocks that are in a downtrend with overbought

RSI turning down. First, stocks must be below their 200-day moving average to be in an overall

downtrend. Second, RSI must cross above 70 to become overbought.

Stochastic Oscillator

Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum

indicator that shows the location of the close relative to the high-low range over a set number of

periods. According to an interview with Lane, the Stochastic Oscillator “doesn't follow price, it

doesn't follow volume or anything like that. It follows the speed or the momentum of price. As a

rule, the momentum changes direction before price.” As such, bullish and bearish divergences in

the Stochastic Oscillator can be used to foreshadow reversals. This was the first, and most

http://stockcharts.com/def/servlet/SC.uscan?s=I.N%7CG.0%7CUSAD%5bT.T_EQ_S%5d%21%5bT.C_EQ_U%5d%21%5bDAS0,20,TV_GT_40000%5d%21%5bDAS0,60,TC_GT_20.00%5d%21%5bDTC0_GT_DAS0,200,TC%5d%21%5bDBS0,5_LE_30%5d

http://stockcharts.com/def/servlet/SC.uscan?s=I.N%7CG.0%7CUSAD%5bT.T_EQ_S%5d%21%5bT.C_EQ_U%5d%21%5bDAS0,20,TV_GT_40000%5d%21%5bDAS0,60,TC_GT_20.00%5d%21%5bDTC0_LT_DAS0,200,TC%5d%21%5bDBS0,5_GE_70%5d


BIET-MBA

important, signal that Lane identified. Lane also used this oscillator to identify bull and bear set-

ups to anticipate a future reversal. Because the Stochastic Oscillator is range bound, is also

useful for identifying overbought and oversold levels.

Calculation Formula

%K = (Current Close - Lowest Low)/(Highest High - Lowest Low) * 100

%D = 3-day SMA of %K

Lowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

%K is multiplied by 100 to move the decimal point two places

The default setting for the Stochastic Oscillator is 14 periods, which can be days, weeks, months

or an intraday timeframe. A 14-period %K would use the most recent close, the highest high over

the last 14 periods and the lowest low over the last 14 periods. %D is a 3-day simple moving

average of %K. This line is plotted alongside %K to act as a signal or trigger line.

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_averages

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_averages


BIET-MBA

Interpretation

The Stochastic Oscillator measures the level of the close relative to the high-low range over a

given period of time. Assume that the highest high equals 110, the lowest low equals 100 and the

close equals 108. The high-low range is 10, which is the denominator in the %K formula. The

close less the lowest low equals 8, which is the numerator. 8 divided by 10 equals .80 or 80%.

Multiply this number by 100 to find %K %K would equal 30 if the close was at 103 (.30 x 100).

The Stochastic Oscillator is above 50 when the close is in the upper half of the range and below

50 when the close is in the lower half. Low readings (below 20) indicate that price is near its low

for the given time period. High readings (above 80) indicate that price is near its high for the

given time period. The IBM example above shows three 14-day ranges (yellow areas) with the

closing price at the end of the period (red dotted) line. The Stochastic Oscillator equals 91 when

the close was at the top of the range. The Stochastic Oscillator equals 15 when the close was near

the bottom of the range. The close equals 57 when the close was in the middle of the range.


BIET-MBA

Fast, Slow or Full

There are three versions of the Stochastic Oscillator available on SharpCharts. The Fast

Stochastic Oscillator is based on George Lane's original formulas for %K and %D. %K in the

fast version that appears rather choppy. %D is the 3-day SMA of %K. In fact, Lane used %D to

generate buy or sell signals based on bullish and bearish divergences. Lane asserts that a %D

divergence is the “only signal which will cause you to buy or sell.” Because %D in the Fast

Stochastic Oscillator is used for signals, the Slow Stochastic Oscillator was introduced to reflect

this emphasis. The Slow Stochastic Oscillator smooths %K with a 3-day SMA, which is exactly

what %D is in the Fast Stochastic Oscillator. Notice that %K in the Slow Stochastic Oscillator

equals %D in the Fast Stochastic Oscillator (chart 2).

Fast Stochastic Oscillator:

Fast %K = %K basic calculation

Fast %D = 3-period SMA of Fast %K

Slow Stochastic Oscillator:


BIET-MBA

Slow %K = Fast %K smoothed with 3-period SMA

Slow %D = 3-period SMA of Slow %K

The Full Stochastic Oscillator is a fully customizable version of the Slow Stochastic Oscillator.

Users can set the look-back period, the number of periods to slow %K and the number of periods

for the %D moving average. The default parameters were used in these examples: Fast

Stochastic Oscillator (14,3), Slow Stochastic Oscillator (14,3) and Full Stochastic Oscillator

(14,3,3).

Full Stochastic Oscillator:

Full %K = Fast %K smoothed with X-period SMA

Full %D = X-period SMA of Full %K

Overbought Oversold

As a bound oscillator, the Stochastic Oscillator makes it easy to identify overbought and

oversold levels. The oscillator ranges from zero to one hundred. No matter how fast a security

advances or declines, the Stochastic Oscillator will always fluctuate within this range.

Traditional settings use 80 as the overbought threshold and 20 as the oversold threshold. These

levels can be adjusted to suit analytical needs and security characteristics. Readings above 80 for

the 20-day Stochastic Oscillator would indicate that the underlying security was trading near the

top of its 20-day high-low range. Readings below 20 occur when a security is trading at the low

end of its high-low range.

Before looking at some chart examples, it is important to note that overbought readings are not

necessarily bearish. Securities can become overbought and remain overbought during a strong

uptrend. Closing levels that are consistently near the top of the range indicate sustained buying

pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also

become oversold and remain oversold during a strong downtrend. Closing levels consistently

near the bottom of the range indicate sustained selling pressure. It is, therefore, important to

identify the bigger trend and trade in the direction of this trend. Look for occasional oversold

readings in an uptrend and ignore frequent overbought readings. Similarly, look for occasional

overbought readings in a strong downtrend and ignore frequent oversold readings.

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_technical_indicators_and_oscillators#banded_oscillators


BIET-MBA

Chart 3 shows Yahoo! (YHOO) with the Full Stochastic Oscillator (20,5,5). A longer look-back

period (20 days versus 14) and longer moving averages for smoothing (5 versus 3) produce a less

sensitive oscillator with fewer signals. Yahoo was trading between 14 and 18 from July 2009

until April 2010. Such trading ranges are well suited for the Stochastic Oscillator. Dips below 20

warn of oversold conditions that could foreshadow a bounce. Moves above 80 warn of

overbought conditions that could foreshadow a decline. Notice how the oscillator can move

above 80 and remain above 80 (orange highlights). Similarly, the oscillator moved below 20 and

sometimes remained below 20. The indicator is both overbought AND strong when above 80. A

subsequent move below 80 is needed to signal some sort of reversal or failure at resistance (red

dotted lines). Conversely, the oscillator is both oversold and weak when below 20. A move

above 20 is needed to show an actual upturn and successful support test (green dotted lines).

Chart 4 shows Crown Castle (CCI) with a breakout in July to start an uptrend. The Full

Stochastic Oscillator (20,5,5) was used to identify oversold readings. Overbought readings were

ignored because the bigger trend was up. Trading in the direction of the bigger trend improves


BIET-MBA

the odds. The Full Stochastic Oscillator moved below 20 in early September and early

November. Subsequent moves back above 20 signaled an upturn in prices (green dotted line) and

continuation of the bigger uptrend.

Chart 5 shows Autozone (AZO) with a support break in May 2009 that started a downtrend.

With a downtrend in force, the Full Stochastic Oscillator (10,3,3) was used to identify

overbought readings to foreshadow a potential reversal. Oversold readings were ignored because

of the bigger downtrend. The shorter look-back period (10 versus 14) increases the sensitivity of

the oscillator for more overbought readings. For reference, the Full Stochastic Oscillator (20,5,5)

is also shown. Notice that this less sensitive version did not become overbought in August,

September and October. It is sometimes necessary to increase sensitivity to generate signals.


BIET-MBA

Bull Bear Divergences

Divergences form when a new high or low in price is not confirmed by the Stochastic Oscillator.

A bullish divergence forms when price records a lower low, but the Stochastic Oscillator forms a

higher low. This shows less downside momentum that could foreshadow a bullish reversal. A

bearish divergence forms when price records a higher high, but the Stochastic Oscillator forms a

lower high. This shows less upside momentum that could foreshadow a bearish reversal. Once a

divergence takes hold, chartists should look for a confirmation to signal an actual reversal. A

bearish divergence can be confirmed with a support break on the price chart or a Stochastic

Oscillator break below 50, which is the centerline. A bullish divergence can be confirmed with a

resistance break on the price chart or a Stochastic Oscillator break above 50.

50 is an important level to watch. The Stochastic Oscillator moves between zero and one

hundred, which makes 50 the centerline. Think of it as the 50 yard line in football. The offense

has a higher chance of scoring when it crosses the 50 yard line. The defense has an edge as long

as it prevents the offense from crossing the 50 yard line. A Stochastic Oscillator cross above 50

http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:introduction_to_technical_indicators_and_oscillators#positive_and_negativ


BIET-MBA

signals that prices are trading in the upper half of their high-low range for the given look-back

period. This suggests that the cup is half full. Conversely, a cross below 50 means prices are

trading in the bottom half of the given look-back period. This suggests that the cup is half empty.

Chart 6 shows International Gaming Tech (IGT) with a bullish divergence in February-March

2010. Notice how the stock moved to a new low, but the Stochastic Oscillator formed a higher

low. There are three steps to confirming this higher low. The first is a signal line cross and/or

move back above 20. A signal line cross occurs when %K (black) crosses %D (red). This

provides the earliest entry possible. The second is a move above 50, which puts prices in the

upper half of the Stochastic range. The third is a resistance breakout on the price chart. Notice

how the Stochastic Oscillator moved above 50 in late March and remained above 50 until late

May.

Chart 7 shows Kohls (KSS) with a bearish divergence in April 2010. The stock moved to higher

highs in early and late April, but the Stochastic Oscillator peaked in late March and formed

lower highs. The signal line crosses and moves below 80 did not provide good early signals in

this case because KSS kept moving higher. The Stochastic Oscillator moved below 50 for the

second signal and the stock broke support for the third signal. As KSS shows, early signals are

not always clean and simple. Signal line crosses, moves below 80 and moves above 20 are

frequent and prone to whipsaw. Even after KSS broke support and the Stochastic Oscillator


BIET-MBA

moved below 50, the stock bounced back above 57 and the Stochastic Oscillator bounced back

above 50 before the stock continued sharply lower.

Bull Bear Set-ups

George Lane identified another form of divergence to predict bottoms or tops. A bull set-up is

basically the inverse of a bullish divergence. The underlying security forms a lower high, but the

Stochastic Oscillator forms a higher high. Even though the stock could not exceed its prior high,

the higher high in the Stochastic Oscillator shows strengthening upside momentum. The next

decline is then expected to result in a tradable bottom. Chart 8 shows Network Appliance

(NTAP) with a bull set-up in June 2009. The stock formed a lower high as the Stochastic

Oscillator forged a higher high. This higher high shows strength in upside momentum.

Remember that this is a set-up, not a signal. The set-up foreshadows a tradable low in the near

future. NTAP declined below its June low and the Stochastic Oscillator moved below 20 to

become oversold. Traders could have acted when the Stochastic Oscillator moved above its


BIET-MBA

signal line, above 20 or above 50. Alternatively, NTAP subsequently broke resistance with a

strong move.

A bear set-up occurs when the security forms a higher low, but the Stochastic Oscillator forms a

lower low. Even though the stock held above its prior low, the lower low in the Stochastic

Oscillator shows increasing downside momentum. The next advance is expected to result in an

important peak. Chart 9 shows Motorola (MOT) with a bear set-up in November 2009. The stock

formed a higher low in late-November and early December, but the Stochastic Oscillator formed

a lower low with a move below 20. This showed strong downside momentum. The subsequent

bounce did not last long as the stock quickly peaked. Notice that the Stochastic Oscillator did not

make it back above 80 and turned down below its signal line in mid December.


BIET-MBA

Rate of Change (ROC)

Introduction

The Rate-of-Change (ROC) indicator, which is also referred to as simply Momentum, is a

pure momentum oscillator that measures the percent change in price from one period to the next.

The ROC calculation compares the current price with the price “n” periods ago. The plot forms

an oscillator that fluctuates above and below the zero line as the Rate-of-Change moves from

positive to negative. As a momentum oscillator, ROC signals include centerline crossovers,

divergences and overbought-oversold readings. Divergences fail to foreshadow reversals more

often than not so this article will forgo a discussion on divergences. Even though centerline

crossovers are prone to whipsaw, especially short-term, these crossovers can be used to identify

the overall trend. Identifying overbought or oversold extremes comes natural to the Rate-of-

Change oscillator.

Calculation Formula

ROC = [(Close - Close n periods ago) / (Close n periods ago)] * 100


BIET-MBA

The table above shows the 12-day Rate-of-Change calculations for the Dow Industrials in May

2010. The yellow cells show the Rate-of-Change from April 28th to May 14th. It is actually 13

trading days, but the close on the 28th acts as the starting point on the 29th. The blue cells show

the 12-day Rate-of-Change from May 7th until May 25th.

Interpretation

As noted above, the Rate-of-Change indicator is momentum in its purest form. It measures the

percentage increase or decrease in price over a given period of time. Think of its as the rise

(price change) over the run (time). In general, prices are rising as long as the Rate-of-Change

remains positive. Conversely, prices are falling when the Rate-of-Change is negative. ROC

expands into positive territory as an advance accelerates. ROC dives deeper into negative

territory as a decline accelerates. There is no upward boundary on the Rate-of-Change. The sky

is the limit for an advance. There is, however, a downside limit. Securities can only decline

100%, which would be to zero. Even with these lopsided boundaries, Rate-of-Change produces

identifiable extremes that signal overbought and oversold conditions.


BIET-MBA

Trend Identification

Even though momentum oscillators are best suited for trading ranges or zigzag trends, they can

also be used to define the overall direction of the underlying trend. There are approximately 250

trading days in a year. This can be broken down into 125 days per half year, 63 days per quarter

and 21 days per month. A trend reversal starts with the shortest timeframe and gradually spreads

to the other timeframes. In general, the long-term trend is up when both the 250-day and 125-day

Rate-of-Change are positive. This means that prices are higher now than they were 12 and 6

months ago. Long positions taken 6 or 12 months ago would be profitable and buyers would be

happy.

Chart 2 shows IBM with the 250-day, 125-day, 63-day and 21-day Rate-of-Change. There have

been three big trends in the last three years. The first was up as the 250-day Rate-of-Change was

largely positive until September 2008 (1). The second was down as the indicator turned negative


BIET-MBA

from October 2008 until September 2009 (2). The third is up as the indicator turned positive in

late September 2009 (3). Even though the big uptrend remains in force, IBM flattened out on the

price chart and this affected the 125-day and 63-day Rate-of-Change. The 63-day Rate-of-

Change (quarterly) has been flirting with negative territory since February (4). The 125-day

Rate-of-Change (six month) dipped into negative territory for the first time since April 2009 (5).

This shows some deterioration in IBM that serves as an alert to watch the stock carefully. A

break below the six month trading range would be a bearish development (6).

Overbought/Oversold Extremes

There are basically three price movements: up, down and sideways. Momentum oscillators are

ideally suited for sideways price action with regular fluctuations. This makes it easier to identify

extremes and forecast turning points. Security prices can also fluctuate when trending. For

example, an uptrend consists of a series of higher highs and higher lows as prices zigzag higher.

Pullbacks often occur at regular intervals based on the percentage move, time elapsed or both. A

downtrend consists of lower lows and lower highs as prices zigzag lower. Counter trend

advances retrace a portion of the prior decline and usually peak below the prior high. Peaks can

occur at regular intervals based on the percentage move, time elapsed or both. The Rate-of-

Change can be used to identify periods when the percentage change nears a level that

foreshadowed a turning point in the past.


BIET-MBA

Chart 3 shows Aetna (AET) with an uptrend from April 2009 until April 2010. Notice how the

stock zigzagged up with a series of higher highs and higher lows. Because the overall trend was

up, the Rate-of-Change indicator was used to identify short-term oversold levels as a chance to

partake in the bigger uptrend. Short-term overbought signals were ignored because the bigger

trend was up. Based on the May-June bounces, -10% was set as the oversold boundary.

Movements below this level indicated that prices were at a short-term extreme. Overbought and

oversold settings depend on the volatility of the underlying security. A more volatile stock may

use -15% for oversold, while a less volatile stock may use -5%. Oversold readings serve as an

alert to be ready for a turning point. Prices are oversold, but have yet to actually turn. Remember,

a security can become oversold and remain oversold as the decline continues. A 20-day moving

average was overlaid to identify an actual upturn. After ROC became oversold in early October,

AET moved above its 20-day SMA in late October to confirm an upturn (1). The second

oversold reading occurred in early February and AET moved above its 20-day SMA in late

February (2).


BIET-MBA

Chart 4 shows Microsoft (MSFT) in a downtrend from November 2007 until March 2009. This

example uses a 20-day Rate-of-Change to identify oversold levels within a bigger downtrend.

The number of time periods depends on the individual security and the desired trading time

frame. The late December high occurred with an overbought reading above +10%. This means

Microsoft was up over 10% in a 20-day period, which is about a month. That's a pretty good

bounce within a bigger downtrend. The next overbought reading did not occur until April when

the Rate-of-Change again exceeded +10%. MSFT broke trend line support in May to signal a

continuation of the downtrend. The next overbought reading occurred in early August 2008. It

took a while, but the stock eventually broke support at 24 in mid-September and again in early

October.


BIET-MBA

Chart 5 shows Abercrombie & Fitch (ANF) within a trading range from October 2006 to

February 2008. The 20-day Rate-of-Change indicator sets overbought at +10% and oversold at -

10%. The overbought and oversold levels identify extremes quite well, but timing the actual turn

is more difficult because of the volatility. The next chart reduces this volatility by using a

exponential moving average in place of the price plot.


BIET-MBA

Chart 6 shows ANF as a 10-day EMA (black) and the actual price plot is invisible. A 30-day

EMA has been overlaid as a signal line. Furthermore, the 20-day Rate-of-Change is shown with

a 5-day SMA to smooth out the fluctuations. There are fewer overbought and oversold readings

using the 5-day SMA. Focusing only on the buy signals, the green dotted line shows when ROC

exceeds -10% and the green arrow shows when the 10-day EMA crosses above the 30-day SMA.

The oversold readings are usually early, but the moving average crossovers are usually late. Such

is life with technical analysis. The point here is to reduce whipsaws by smoothing the data. A 10-

day EMA was used because it is faster than a 10-day SMA. A 30-day SMA was used because it

is slower than a 30-day EMA. Speeding up the shorter moving average and slowing down the

longer moving average makes for slightly quicker signals.


BIET-MBA

The P/E Ratio

Analysts have argued for years about the merits of price (P/E) ratios. When P/Es are high, as

they were in the late 1920s and 1990s, raging bulls would proclaim that the ratios are irrelevant.

When P/Es are low, as they were in the 1930s and 1980s, marauding bears would argue that the

worst is still ahead. Each time, both were wrong. Here we test a newly designed indicator to

determine if P/Es can be effectively used to generate buy and sell signals. To get a complete

picture of its effectiveness, we'll look at whether this indicator would have helped the trader beat

the returns rendered by a buy-and-hold strategy over the period from 1920 through to 2003.

Trading Tools - Building the P/E SMA Indicator

Simple moving averages (SMAs) are one of the most basic tools for building a trading system

but they have remained popular among technicians for one simple reason: they work. A moving

average (MA) reduces the noise by smoothing the data, allowing the trader to see the bigger

picture more clearly.

Another useful charting metric for analyzing data is a linear regression line. It is very useful in

showing a trend and providing insight into potential future price movement. A number of

popular charting programs include a function for the linear regression line.

Using annual historic S&P P/E ratio data by Robert Shiller, Yale Professor and author of the

best-selling book "Irrational Exuberance" (2000), we constructed charts and a simple moving

average crossover system using a shorter-term MA trigger, or fast line, and the long-term MA

base, or slow line. The signals generated by changes in S&P Index P/Es, which are charted in

figure 1, were used to buy and sell the market as represented by the Dow Jones Industrial

Average, which is charted in figure 2.

The best combination of moving averages is somewhat of a juggling act. Longer-term MA

periods reduce the number of signals and add delays, which often result in lower returns. Shorter

MA periods often increase some individual trade returns at the expense of adding more losing


BIET-MBA

trades, thanks to whipsaws.

Figure 1, as already mentioned, is a chart showing annual S&P 500 Index (and earlier

precursors) price/earnings ratios from 1920 through 2003. The chart displays also the two-year

(blue line) and five-year (magenta line) simple moving averages. Buy signals occur when the

two-year SMA crosses above the five-year, and a sell signal when the two-year crosses below the

five-year. The median P/E over the period was 15, but note that the linear regression channel

midline (dashed diagonal line) shows that the trend moved from a PE of 12 at the left hand side

of the chart to 21 on the right side.

In figure 2, showing the monthly chart of the Dow Jones Industrial Average (DJI) from 1920

through 2003, the green arrows indicate buy signals generated by the two-year S&P P/E SMA

crossing above the five-year SMA, and the red arrows show sell signals when the reverse occurs

in figure 1. A total of six buy and six sell signals were generated for a total gain of 9439.25 DJIA

points.


BIET-MBA

For the sake of our test, a two-year moving average signal line was found to remove much of the

noise without adding excessive delay. The baseline consisting of a five-year moving average was

determined to be a good fit. A one-year signal line instead of a two-year was tested and found to

provide the same number of trades but with slightly lower returns.

How Did the P/E SMA Indicator Do?

In a total of 12 trades (six buys and six sells), the system returned 9,440 points (see figure 2). A

buy-and-hold over the same period would have returned 10,382, so our indicator lead the trader

to capture nearly 91% of the gains the Dow made during the 83-year period.

But the real benefit of using the P/E SMA indicator is that it told the investor when to leave the

market, thereby protecting investments from losses. Using the P/E indicator, our trader would

have been in the market a total of 48 of the 83 years, or 58% of the time, which means he or she

would have had money invested elsewhere 42% of the time (25 years) where returns were

better.

A buy-and-hold investment in the market for the whole 83-year period earned 10,382 by the end

of 2003, which works out to 125 points/year. The trader using our P/E indicator, gaining 9,440

points in 48 investing years, would have made 197 points per year. That is a 58% better return


BIET-MBA

than the buy-and-hold investor!

Given these results using annual data, we can ask whether the use of monthly data would have

improved overall results. The best-fitting set of moving averages for our monthly indicator was

found to be five- and 21-month SMAs. This system (not shown in a chart here) generated a total

of 22 buy and 21 sell signals. The last buy signal was given in Nov 2003 and the system was

still long when our test was concluded at the end of Jan 2004.

Trades using the monthly system would have earned 90% of the total Dow gains in 57% of the

time (47 years). So, even though this test generated more than three times the number of trades,

results were quite similar. The difference was that although trades were entered more quickly,

often resulting in bigger gains, the increased number of signals resulted in more exposure

to volatility and a greater percentage of losing trades.

Using the P/E SMA Indicator to Short

The next question we can tackle is whether the indicator would have performed if both long

and short trades were taken. Entering a short trade of equal size each time a long position was

sold would have given losses of 510 points in five short trades for an average loss of 102 points

per trade. Based on the chart in figure 1, this makes sense: the linear regression channel shows

that the market was in an overall uptrend from 1920, and as all good traders know, it is a bad

idea to trade against the trend.

The P/E SMA indicator benefited the trader not so much by offering a straight trading system to

generate both long and short trades, but by guiding the trader out of the market during periods of

low or negative returns. As a simple long trade timing tool, it worked extremely well.


BIET-MBA

Chapter- 4

The chart below show the Nifty and its RSI Stochastic and ROC

0

1000

2000

3000

4000

5000

6000

7000

8000

Close

Close

1015202530

P/E

P/E

0

20

40

60

80

100

%K

%D Slow

S %D signal line

0

50

100Series1

Series2

Series3

-25-20-15-10-505

10152025

ROC

ROC


BIET-MBA

Interpretation:

P/e Ratio has shown divergence and failure swings. Shift in channels and channel breakout can been seen

here. The P/E ratio gives early breakouts compared to the index price. The RSI, Stochastic and ROC also

give early breakout but are frequent in nature.


BIET-MBA

The chart below show the CNX IT and its RSI Stochastic and ROC

0

2000

4000

6000

8000

10000

12000

Close

Close

51015202530354045505560

P/E

15

25

35

45

55

65

75

85

RSI

70

30

0

50

100

%K

%D Slow

S %D signal line


BIET-MBA

Interpretation:

The P/E is a leading indicator oscillator with predictive qualities. In the sample above we are able to see

Divergence and failure swings. The P/E Breakout are the major trend reversal conformation. As compared

to RSI, stochastic and ROC it do not give frequent buy and sell signal.

-30-25-20-15-10-505

101520

ROC

ROC


BIET-MBA

The chart below show TCS and its RSI Stochastic and ROC

0

500

1000

1500

2000

2500

1

92

18

3

27

4

36

5

45

6

54

7

63

8

72

9

82

0

91

1

10

02

10

93

11

84

12

75

13

66

14

57

15

48

16

39

17

30

18

21

19

12

20

03

20

94

21

85

22

76

23

67

Modified Close

Modified Close

0100200300400500600700

P/E Ratio

P/E Ratio

-30

-10

10

30

ROC

ROC


BIET-MBA

Interpretation:

The P/E ratio is having not shown any divergence. This show, if the p/e ratio is high it is not necessary

that the stock price is high. The RSI, stochastic and ROC gave better signals than P/E Ratio

Note:

Here the chart above include modified close where in the closing price is divided with the ratio of bonus

share issued and the ratio of stock split

0

20

40

60

80

100

Series1

Series2

Series3


BIET-MBA

The chart below show WIPRO and its RSI Stochastic and ROC

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

MODIFIED CLOSE

0

50

10070OVERBOUG…

-200

0

200 ROC

ROC

0

50

100%K

%DSlow

01020304050

P/E Ratio


BIET-MBA

Interpretation:

The shift in channel shift work and we are not seeing any divergence but show few failure swings in the

chart above. The P/E ratio‟s support and resistance also works as a major reversal signals.

Note:

Here the chart above include modified close where in the closing price is divided with the ratio of bonus

share issued and the ratio of stock split.


BIET-MBA

Chapter 5

Summaries of Findings, Suggestions and Conclusion

Findings

P/E ratio have predictive indicator oscillator

P/E ratio is a leading indicator

P/E ratio do not give frequent buy/sell signals

P/E ratio give channel and trend-line breakouts.

P/E ratio gives early conformation breakout in trend-line.

The return of the stock and the return of P/E is identical most of the time

Suggestions

There is no overbought and oversold zone for P/E ratio as in RSI and stochastic

P/E ratio and closing price looks alike but they are not same.

Buy when P/E is low and sell when P/E ratio is high.

P/E show divergence and failure swings which is essential in investment decisions.

P/E Ratio needs to be used by the investors as there are few entry and exit levels.

Conclusions

P/E ratio is used for a long time as a fundamental tool and it is very recent that it has been used

as a technical indicator.

In the comparison on indicator oscillator we found that the P/E ratio is not giving rapid buy and

sell signal like RSI, ROC and stochastic. But the P/E Ratio give some good entry and exit level

from a particular stocks/ Index.

Thus it can be used by the investor who requires less entry and exit strategy from the indicators.

This is an added advantage for the investors as they don‟t require more buy and sell signals.

It is always told that the price is the reflection of the value of the company, and P/E ratio gives

the fundamental value of the company. As we are using P/E ratio as a technical indicator it

satisfy both technical and fundamental and help analyst and traders to come up with good

decision.

Performance of PE Ratio as an Technical Indicator

Data & Analytics

Transcript of Performance of PE Ratio as an Technical Indicator