Technical AnalysisTechnical Analysis

Presentation Presentation by V. Sriramby V. Sriram

Limitations of fundamental Limitations of fundamental analysisanalysis

Recognition of true value of security is Recognition of true value of security is difficultdifficult

Involves considerable work and time Involves considerable work and time Inadequacy of income statementInadequacy of income statement Subjective aspects of earningsSubjective aspects of earnings

Technical Analysis-BasisTechnical Analysis-Basis

Price as a comprehensive outcome of all Price as a comprehensive outcome of all market forcesmarket forces

The repetition of market price behaviourThe repetition of market price behaviour The tendency of markets to move in trendsThe tendency of markets to move in trends

Technical Analysis-BenefitsTechnical Analysis-Benefits

Offers clear trading signalsOffers clear trading signals Easy methodsEasy methods Easy to computeEasy to compute Increasingly becoming more sophisticatedIncreasingly becoming more sophisticated Enhances a trader’s confidenceEnhances a trader’s confidence

Dow’s Six PrinciplesDow’s Six Principles

Market discounts everythingMarket discounts everything Market moves in three trendsMarket moves in three trends Primary trend consists of three phasesPrimary trend consists of three phases Averages must confirm each otherAverages must confirm each other Volume must confirm the trendVolume must confirm the trend Trends exist until their reversal if confirmedTrends exist until their reversal if confirmed

Basic Assumptions underlying Basic Assumptions underlying Technical AnalysisTechnical Analysis

Market value is determined by the interaction of supply Market value is determined by the interaction of supply and demandand demand

Supply and demand are governed by numerous factors, Supply and demand are governed by numerous factors, both rational and irrationalboth rational and irrational

Security prices tend to move in trends that persist for Security prices tend to move in trends that persist for an appreciable length of timean appreciable length of time

Changes in a trend are caused by the shifts in supply Changes in a trend are caused by the shifts in supply and demandand demand

Shifts in supply and demand, no matter why they Shifts in supply and demand, no matter why they occur, can be detected sooner or lateroccur, can be detected sooner or later

Some chart patterns tend to repeat themselvesSome chart patterns tend to repeat themselves

Three components of trendThree components of trend

Primary trend called bear or bull marketsPrimary trend called bear or bull markets

Secondary trend called correction Secondary trend called correction

Tertiary moves which are daily fluctuationsTertiary moves which are daily fluctuations

Concepts of trendConcepts of trendDrawing trend lineDrawing trend line Use of trend lineUse of trend line Support and resistanceSupport and resistance Reversal of rolesReversal of roles Psychology of supports and resistancesPsychology of supports and resistances Channel lineChannel line3 types of gaps3 types of gaps

Basic toolsBasic tools

Trend linesTrend lines

Fibonacci retracementFibonacci retracement

Moving averageMoving average

Exponential moving averageExponential moving average

Bollinger BandsBollinger Bands

Two trading bands are placed around a Moving Average with Two trading bands are placed around a Moving Average with

2 Standard Deviation above an below the moving average 2 Standard Deviation above an below the moving average

which is usually 20 days. which is usually 20 days.

Prices are considered to be over extended on the upside when Prices are considered to be over extended on the upside when

they touch the upper band and vice-versa.they touch the upper band and vice-versa.

If prices bounce off the lower band and cross above the 20 day If prices bounce off the lower band and cross above the 20 day

average, the upper band becomes the price target.average, the upper band becomes the price target.

OscillatorsOscillators

Oscillators are extremely useful in non-trending markets / Oscillators are extremely useful in non-trending markets / trading range. trading range.

Oscillators provide with a tool that can enable trader from Oscillators provide with a tool that can enable trader from these periodic sideways and trendless market movements. these periodic sideways and trendless market movements. Used in conjunction with price charts during trending phases, Used in conjunction with price charts during trending phases, the oscillator becomes an extremely becomes an extremely the oscillator becomes an extremely becomes an extremely valuable ally by alerting the traders to short term market valuable ally by alerting the traders to short term market extremes. Commonly referred as over bought or over extremes. Commonly referred as over bought or over conditions.conditions.

Oscillators can also warn that the trend is loosing momentum Oscillators can also warn that the trend is loosing momentum and signal that the trend may be nearing completion by and signal that the trend may be nearing completion by displaying certain divergences. displaying certain divergences.

3 important uses of Oscillators3 important uses of Oscillators

Oscillator is most useful when its value reaches an extreme Oscillator is most useful when its value reaches an extreme

reading near the upper or lower end of its boundaries.reading near the upper or lower end of its boundaries.

A divergence between the oscillators and the price action A divergence between the oscillators and the price action

when the oscillator is in an extreme position, is usually an when the oscillator is in an extreme position, is usually an

important warning.important warning.

Crossing of zero line can give important trading signal in the Crossing of zero line can give important trading signal in the

direction of the price trend. direction of the price trend.

Measuring MomentumMeasuring Momentum

Momentum measures the velocity of price changes as opposed Momentum measures the velocity of price changes as opposed

to the actual price levels themselves.to the actual price levels themselves.

Market momentum is measured by continually taking price Market momentum is measured by continually taking price

differences for a fixed time interval.differences for a fixed time interval.

Momentum M= V-Vx, where V is the latest closing price and Momentum M= V-Vx, where V is the latest closing price and

Vx is the closing price x days agoVx is the closing price x days ago

DivergenceDivergence

Movement of market trends in directions other than those Movement of market trends in directions other than those

predicted by market indicators. Divergence usually signals the predicted by market indicators. Divergence usually signals the

onset of a trend change.onset of a trend change.

Use of various oscillators to identify various divergences.Use of various oscillators to identify various divergences.

Reversal patternsReversal patterns Pre-requisites for any reversal pattern is the existence of a Pre-requisites for any reversal pattern is the existence of a

prior trend.prior trend.

The first signal of an impending trend reversal is often the The first signal of an impending trend reversal is often the breaking of an important trend linebreaking of an important trend line

The larger the pattern, the greater the subsequent move, The larger the pattern, the greater the subsequent move, volume is generally more important on the upsidevolume is generally more important on the upside

Various patterns- Head and Shoulder, Inverse Head and Various patterns- Head and Shoulder, Inverse Head and Shoulder, Triple tops and bottoms, Double tops and bottoms, Shoulder, Triple tops and bottoms, Double tops and bottoms, Saucers and spikes.Saucers and spikes.

Classical patternsClassical patterns

Trend reversalTrend reversal

- Head and shoulder and

inverse there of

- Double top/ Double bottom

- Rounded top and bottom

- Diamond formation

- Rectangle formation

Continuation patternContinuation pattern

- Flag formationFlag formation

- Pennant formationPennant formation

- Triangle formationTriangle formation

- Wedge formationWedge formation

Candle stick chartingCandle stick charting

Bullish signalBullish signal

Bearish signalBearish signal

Reversal signalReversal signal

Wait & Watch signalWait & Watch signal

Elliot Wave Theory Elliot Wave Theory Wave 1- It is difficult to identify. It is often shortest Wave 1- It is difficult to identify. It is often shortest

of impulse wavesof impulse waves

Wave 2 – It should be easier to identify due to its Wave 2 – It should be easier to identify due to its three-subwave structurethree-subwave structure

Wave 3 – Its is not the shortest. Penetration of the Wave 3 – Its is not the shortest. Penetration of the high of wave 1 attracts more buyers or more sellershigh of wave 1 attracts more buyers or more sellers

Wave 4 – If wave 2 is complex, then wave 4 tends to Wave 4 – If wave 2 is complex, then wave 4 tends to have a less complexion pattern, and vice versahave a less complexion pattern, and vice versa

Wave 5 – It can be dynamic and extendedWave 5 – It can be dynamic and extended

Elliot Wave Theory …..cont’dElliot Wave Theory …..cont’d

Wave A – It is difficult to catch through all the Wave A – It is difficult to catch through all the euphoriaeuphoria

Wave B – It may be of different complexities Wave B – It may be of different complexities and lengthsand lengths

Wave C – It puts the stamp on the end of the Wave C – It puts the stamp on the end of the trend. Following a bull market, wave C should trend. Following a bull market, wave C should fall below the bottom of wave Afall below the bottom of wave A

Essential RuleEssential Rule

Second Wave may never retrace more than 100 % of Second Wave may never retrace more than 100 % of

the first wave.the first wave.

Third wave is never the shortest wave in a impulse Third wave is never the shortest wave in a impulse

sequence; often it is the longest.sequence; often it is the longest.

Wave four can never enter the price range of wave one.Wave four can never enter the price range of wave one.

Specific Characteristics – Impulse waveSpecific Characteristics – Impulse wave Wave one is difficult to identify as it mimics a correction. Wave one is difficult to identify as it mimics a correction.

Wave two is generally easier to identify because of its three sub Wave two is generally easier to identify because of its three sub wave structure. This wave tends to generate a major reversal wave structure. This wave tends to generate a major reversal pattern.pattern.

Wave three tends to be the longest and it is never the shortest. Wave three tends to be the longest and it is never the shortest. This wave makes good volume, fundamentals tend to support the This wave makes good volume, fundamentals tend to support the move and the psychology of the market is positive.move and the psychology of the market is positive.

Wave two is complex than wave four, wave four tends to have Wave two is complex than wave four, wave four tends to have less complex pattern and vice-versa. This wave is prone to less complex pattern and vice-versa. This wave is prone to triangular formation.triangular formation.

Wave five may be dynamic and extended. Oscillators are helpful Wave five may be dynamic and extended. Oscillators are helpful in determining when the underlying instruments are over in determining when the underlying instruments are over extended. extended.

Specific Characteristics – Corrective Specific Characteristics – Corrective waveswaves

Wave A is more difficult to identify, Wave A is more difficult to identify, fundamental clue comes from its 5 sub wave fundamental clue comes from its 5 sub wave structure.structure.

Wave B may be of different complexities and Wave B may be of different complexities and length.length.

Wave C signals the end of the trend. Wave C signals the end of the trend. Following a bull market, wave C should fall Following a bull market, wave C should fall below the bottom of wave A. below the bottom of wave A.

Candle Sticks AnalysisCandle Sticks Analysis Various types of Doji.Various types of Doji. Hammer Hammer HangmanHangman Bullish / Bearish engulfing patternBullish / Bearish engulfing pattern Star candle sticksStar candle sticks Tweezers candle sticksTweezers candle sticks Morning / Evening starMorning / Evening star Three River evening starThree River evening star Two crowsTwo crows Three gaps.Three gaps.

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