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Rishikesh R Kshirsagar
Masters in Financial Services Management (M.F.S.M) Academic Year 2011-12
University of Mumbais Alkesh Dinesh Mody Institute For Financial and Management Studies
Declaration
I, Mr. Rishikesh Ravindra Kshirsagar TYMFSM Student of Alkesh Dinesh Mody Institute for Financial and Management Studies, hereby declare that I have completed the project titled Technical analysis of State Bank of India during the academic year 2011-2012. The report work is original and the information/data included in the report is true to the best of my Knowledge. Due credit is extended on the work of Literature/Secondary Survey by endorsing it in the Bibliography as per prescribed format.
University of Mumbais Alkesh Dinesh Mody Institute For Financial and Management Studies
Certificate
I, Professor Pankaj Bhattacharjee hereby certify that Mr. Rishikesh Ravindra Kshirsagar, TYMFSM Student of Alkesh Dinesh Mody Institute for Financial and Management Studies has completed a project titled Technical analysis of State Bank of India in the academic year 2011-2012. The work of the student is original and the information included in the project is true to the best of my Knowledge.
TABLE OF CONTENTS
S.NO. 1. 2. 3 4 5 6 7 8 9 10 11 12 PARTICULARS
Introduction Technical analysis Dow Theory Drawbacks / limitations of technical analysis Tools & Instruments in technical analysis Chart Types Trends In Technical Analysis
PAGE NO.
5 8 10 15 18 20 37 45 Why Volume Is Important 48 Chart Patterns 73 Technical Indicators Technical analysis of State Bank of India 87 95 Bibliography
method which enables the investor to arrive at buying & selling decision. The financial analysts always need yardsticks to evaluate the efficiency & performances of any business unit at the time of investment. Fundamental analysis is useful in long term investment decision. In Fundamental analysis a company s goodwill, Its performances, liquidity, leverage, turnover, profitability & financial health was checked & analysis with the help of ratio analysis for the purpose of long term successful investment. Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term price travels. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to the late 19th century.
1. Works only in normal share-market conditions with great reliability, it also works in abnormal share-market conditions, but with low reliability.
2.
Equity
analysis
is
purely
based
on
the
INVESTMENT
PHILOSOPHY, so the investment object has vital importance associated to return along with risk. 3. Cash management gets the magnitude role, because the scenario of equity analysis is revolving around the term money
5. Capital market trend is always a friend, whether it is short run or long run.
6. You are buying stock & not companies, so don t are curious or panic to do Post-mortem of companies performances
7. History repeats: investors & speculators react the same way to the same types of events homogeneously.
8. Capital market has a typical market psychology along with other issues like; perceptions, the crowd Vs the individual, tradition s & trust.
9. An individual perceptions about the investment return & associated risk may differ from individual to individual. 10. Although the equity analysis is art as well as sciences so, it also has some Exceptions
EQUITY ANALYSIS
FUNDAMENTAL ANALYSIS
TECHNICAL ANALYSIS
Technical analysis:Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term price travels. It is important criteria for selecting the company to invest. It also provides the base for decision-making in investment. The one of the
most frequently used yardstick to check & analyze underlying price progress. For that matter a verity of tools was consider. This Technical analysis is helpful to general investor in many ways. It provides important & vital information regarding the current price position of the company. Technical analysis involves the use of various methods for charting, calculating & interpreting graph & chart to assess the performances & status of the price. It is the tool of financial analysis, which not only studies but also reflecting the numerical & graphical relationship between the important financial factors. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to the late 19th century. It uses charts and computer programs to study the stocks trading volume and price movements in the hope of identifying a trend. In fact the decision made on the basis of technical analysis is done only After inferring a trend and judging the future movement of the stock on the basis of the trend. Technical Analysis assumes that the market is efficient and the price has already taken into consideration the other factors related to the company and the industry. It is because of this
assumption that many think technical analysis is a tool, which is effective for short-term investing.
DOW THEORY: Charles Dow who was editor of Wall Street Journal in 1900 is known for the most important theory developed by him with technical indicators. In fact, the theory gained so much significance that the theory was named after him. The Dow Theory has been further developed by other technical analysts and it forms the basis of the technicians theory. The theory predicts trends in the market for individual and total existing securities. It also shows reversals in stock prices. According to Dow theory, the market always has three movements and the movements are simultaneous in the nature. These movements may be described as: The narrow movement which occurs from day to day.
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The short swing which usually moves for short time like two weeks and extends up to a month; this movement can be called a short term movement, and The third movement is also the main movement and it covers for years in its duration. According to the type of movements, they have been given special names. The narrow movement is called fluctuations the short swing is better known as secondary movements and the main movement is also called the primary trends. Narrow movements are called fluctuations. Secondary movements are those which last only for a short while and they are also known as corrections. Primary trends are, therefore, the main movement in the stock market. It is also called Bears and Bulls market. According to the Dow Theory, the price movements in a market can be identified by means of a line-chart.
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In this chart the technical analyst should plot the price of the share. With it, he should also mark the market average every day. This would help in identifying the primary and secondary movements. Dow theorists believe in momentum, which, according to them, keeps the price moving in the same direction. They believe in primary trends, which according to them are momentum or bear and bull markets. The momentum will carry the prices further but momentum of primary trend will be halted by the terminology used by technical analysts called support areas and resistance areas.
Criticism of Dow Theory The Dow Theory is subject to various limitations in actual practice. Dow has developed this theory to depict the general trend of the market but not with the intention of projecting the
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future trend or to diagnose the buy and sell signals in the market. These applications of the Dow Theory have come in the light of analytical studies of financial analysts. This theory is criticized on the ground that it is too subjective and based on historical interpretation; it is not infallible as it depends on the interpretative ability of the analyst. The results of this theory do not also give meaningful and conclusive evidence of any action to be taken in terms of buy and sell operations.
Candlestick Charting The candle is comprised of two parts, the body and the shadows. The body encompasses the open and closing price for the period. The candle body is black if the security closed below the open, and white if the close was higher than the open for the period. The candlestick shadow encompasses the intra period high and low.
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thing that matters is a security's past trading data and what information this data can provide about where the Security might move in the future.
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2) Computers and the Internet have made this process much easier. Most brokers provide basic charts and technical indicators for free or at a very low cost. 3) One way to avoid getting frustrated by all the lines, colours, and Graphics is to focus on using only a few indicators that will Provide you with the information needed. Try not to clutter your Chart with too much information.
If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove. Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself while others would suffice to say that we should learn from the past.
Usually the following tools & instruments are used to do the technical analysis:
Price Fields
Technical analysis is based almost entirely on the analysis of price and volume. The fields which define a security's price and volume are explained below.
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Open - This is the price of the first trade for the period (e.g., the first
trade of the day). When analyzing daily data, the Open is especially important as it is the consensus price after all interested parties were able to "sleep on it."
High - This is the highest price that the security traded during the
period. It is the point at which there were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices, but the High represents the highest price buyers were willing to pay).
Low - This is the lowest price that the security traded during the period.
It is the point at which there were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices, but the Low represents the lowest price sellers were willing to accept).
Close - This is the last price that the security traded during the period.
Due to its availability, the Close is the most often used price for analysis. The relationship between the Open (the first price) and the Close (the last price) are considered significant by most technicians. This relationship is emphasized in candlestick charts.
Volume - This is the number of shares (or contracts) that were traded
during the period. The relationship between prices and volume (e.g., increasing prices accompanied with increasing volume) is important.
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Bid - This is the price a market maker is willing to pay for a security
(i.e., the price you will receive if you sell).
Ask - This is the price a market maker is willing to accept (i.e., the price
you will pay to buy the security).
Bar Charts :
The highs and lows of a foreign currency are plotted in a diagram and the points are joined with vertical lines (bars). A small horizontal tick to the left denotes the opening level while a small horizontal tick to the right represents the closing price of each interval.
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2) Line Chart. It gives the detailed information about every aspect. The exchange rates for each time period are plotted in a diagram and the points are joined. Prices on the y-axis, time on the x-axis. The line chart chooses for example the closing price of consecutive time periods, but can also work with daily, official fixings.
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The relatively easy handling of line charts is a great advantage. Line charts do not show price movements within a time period. This can be a problem because important information for exchange rate analysis can be lost. This Problem was remedied with the development of bar charts that represent a more sophisticated form of line chart.
3) Candlestick Chart. A candlestick is black if the closing price is lower than the opening price. A candlestick is white if the closing price is higher than the opening price.
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In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation. Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick Charts are simply a new way of looking at prices, they don't involve any calculations. Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices. The interpretation of candlestick charts is based primarily on patterns. The most popular patterns are explained below.
Bullish Patterns
1) Long white (empty) line. This is a bullish line. It occurs when prices open near the low and close significantly higher near the period's high.
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2) Hammer. This is a bullish line if it occurs after a significant downtrend. If the line occurs after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low is significantly lower than the open, high, and lose). The body can be empty or filled-in.
3) Piercing line. This is a bullish pattern and the opposite of a dark cloud cover. The first line is a long black line and the second line is a long white line. The second line opens lower than the first line's low, but it closes more than halfway above the first line's real body.
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4) Bullish engulfing lines. This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.
5) Morning star. This is a bullish pattern signifying a potential bottom. The "star" indicates a possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in.
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6) Bullish doji star. A "star" indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the morning star, above) before trading a doji star. The first line can be empty or filled in.
Bearish Patterns
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1) Long black (filled-in) line. This is a bearish line. It occurs when prices open near the high and close significantly lower near the period's low.
2) Hanging Man. These lines are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low was significantly lower than the open, high, and close). The bodies can be empty or filled-in.
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3) Dark cloud cover. This is a bearish pattern. The pattern is more significant if the second line's body is below the centre of the previous line's body (as illustrated).
4) Bearish engulfing lines. This pattern is strongly bearish if it occurs after a significant uptrend (i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) line is engulfed by a large bearish (filled-in) line.
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5) Evening star. This is a bearish pattern signifying a potential top. The "star" indicates a possible reversal and the bearish (filled-in) line confirms this. The star can be empty or filled in.
6) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.
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7) Shooting star. This pattern suggests a minor reversal when it appears after a rally. The star's body must appear near the low price and the line should have a long upper shadow.
Reversal Patterns
1) Long-legged doji. This line often signifies a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large.
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2) Dragon-fly doji. This line also signifies a turning point. It occurs when the open and close are the same, and the low is significantly lower than the open, high, and closing prices.
3) Gravestone doji. This line also signifies a turning point. It occurs when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices.
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4) Star. Stars indicate reversals. A star is a line with a small real body that occurs after a line with a much larger real body, where the real bodies do not overlap. The shadows may overlap.
5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.
Neutral Patterns
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1) Spinning tops. These are neutral lines. They occur when the distance between the high and low, and the distance between the open and close, are relatively small.
2) Doji. This line implies indecision. The security opened and closed at the same price. These lines can appear in several different patterns. Double doji lines (two adjacent doji lines) imply that a forceful move will follow a breakout from the current indecision.
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4)
history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis. When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signalling a trend change.
Summary of charts
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Isnt it hard to see that the trend is up? However, it's not always this easy to see a trend:
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There are lots of ups and downs in this chart, but there isn't a clear indication of which direction this security is headed.
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It is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend each successive low must not fall below the previous lowest point or the trend is deemed a reversal.
Types of Trend
There are three types of trend: 1. Uptrend 2. Downtrend 3. Sideways/Horizontal Trends As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If you want to get really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in
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either direction. In any case, the market can really only trend in these three ways: up, down or nowhere.
Trend Lengths
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a longterm trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look.
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When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or
daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a onemonth trend is not as significant as a five-year trend.
Trend Lines
A trend line is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trend line is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also used in the identification of trend reversals.
An upward trend line is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trend line helps traders to anticipate the point at which a stock's price will begin
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moving upwards again. Similarly, a downward trend line is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.
Channels
A channel, or channel lines, is the addition of two parallel trend lines that act as strong areas of support and resistance. The upper trend line connects a series of highs, while the lower trend line connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.
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A descending channel on a stock chart; the upper trend line has been placed on the highs and the lower trend line is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue.
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with weak volume. Say, for example, that a stock jumps 5% in one trading day after
being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal. Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end. When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume.
and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end. Now that we have a better understanding of some of the important factors of technical analysis, we can move on to charts, which help to identify trading opportunities in prices movements.
CHART PATTERNS:A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy and sell signals. In the first section of this tutorial, we talked about the three assumptions of technical analysis, the third of which was that in technical analysis, history repeats itself. The theory behind chart patterns is based on this assumption. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, chartists look for these Patterns to identify trading opportunities. While there are general ideas and components to every chart pattern, there is no chart pattern that will tell you with 100% certainty where a security is headed. This creates some leeway and debate as to what a good pattern looks like, and is a major reason why charting is often seen as more of an art than a science. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over charts of any timeframe. In this section, we will review some of the more popular chart patterns.
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__________________________________________________________ ____
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Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows. 2. Cup and Handle
a cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.
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The price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue.
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A double top pattern is shown on the left, while a double bottom pattern is shown on the right. In the case of the double top pattern, the price movement has
twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward.
4. Triangles Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.
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The symmetrical is a pattern in which two trend lines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trend line is flat and the upper trend line is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.
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sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.
There is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line
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Confusion can form with triple tops and bottoms during the formation of the pattern because they can look similar to other chart patterns. After the first two support/resistance tests are formed in the price movement, the pattern will look like a double top or bottom, which could lead a chartist to enter a reversal position too soon. 7. Rounding Bottom
a rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to last anywhere from several Months to several years.
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A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle. The longterm nature of this pattern and the lack of a confirmation trigger, such as the handle in the cup and handle, make it a difficult pattern.
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Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).
Support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the Red Arrows).
These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trend lines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance likely be established.
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Role Reversal
Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance.
For example,
as you can see, the dotted line is shown as a level of resistance that has
prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance is broken, it becomes a level of support (shown by Points 3 and 4) by propping up the price and preventing it from heading lower again.
Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most well-known companies. For example, this phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice how the role of the $51 level changes from a strong level of support to a level of resistance.
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In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels.
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For example, if prices moved above the resistance levels of an upward trending channel, the trend have accelerated, not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support.
MOVING AVERAGES:Most chart patterns show a lot of variation in price movement. This can make it difficult for traders to get an idea of a security's overall trend. One simple method traders use to combat this is to apply moving averages. A moving average is the average price of a security over a set amount
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of time. By plotting a security's average price, the price movement is smoothed out. Once the dayto-day fluctuations are removed, traders are better able to identify the true trend and increase the probability that it will work in their favour.
Types of Moving Averages: There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ in regards to the weighting that they place on the price data, shifting from equal weighting of each price point to more weight being placed on recent data. The three most common types of moving averages are simple, linear and exponential.
1.
the sum of all of the past closing prices over the time period and divides the result by the number of prices used in the calculation. For example, in a 10-day moving average, the last 10 closing prices are added together and then divided by 10. As you can see in Figure 1, a trader is able to make the average less responsive to changing prices by increasing the number of periods used in the calculation. Increasing the number of time periods in the calculation is one of the best ways to gauge the strength of the long-term trend
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Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence. The critics argue that the most recent data
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is more important and, therefore, it should also have a higher weighting. This type of criticism has been one of the main factors leading to the invention of other forms of moving averages.
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Another method of determining momentum is to look at the order of a pair of moving averages. When a short-term average is above a longerterm average, the trend is up. On the other hand, a long-term average
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above
shorter-term
average
signals
downward
movement
in
the
trend.
Moving average trend reversals are formed in two main ways: when the price moves through a moving average and when it moves through moving average crossovers. The first common signal is when the price moves through an important moving average. For example, when the price of a security that was in an uptrend falls below a 50-period moving average, it is a sign that the uptrend may be reversing.
The other signal of a trend reversal is when one moving average crosses through another. For example, if the 15-day moving average crosses above the 50-day moving average, it is a positive sign that the price will start to increase.
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If the periods used in the calculation are relatively short, for example 15 and 35, this could signal a short-term trend reversal. On the other hand, when two averages with relatively long time frames cross over (50 and 200, for example), this is used to suggest a long-term shift in trend. Another major way moving averages are used is to identify support and resistance levels. It is not uncommon to see a stock that has been falling stop its decline and reverse direction once it hits the support of a major moving average. A move through a major moving average is often used as a signal by technical traders that the trend is reversing. For example, if the price breaks through the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.
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Moving averages are a powerful tool for analyzing the trend in a security. They provide useful support and resistance points and are very easy to use. The most common time frames that are used when creating moving averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to be a good measure of a trading year, a 100-day average of a half a year, a 50-day average of a quarter of a year, a 20-day average of a month And 10 day average of two weeks.
Moving
averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend. So far we have been focused on price movement, through charts and averages. In the next section, we'll look at some other techniques used to confirm price movement and patterns.
Technical Indicators
BOLLINGER BANDS Overview
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Bollinger Bands are similar to moving average envelopes. The difference between Bollinger Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving average, whereas Bollinger Bands are plotted at standard deviation levels above and below a moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting: widening during volatile markets and contracting during calmer periods. Bollinger Bands were created by John Bollinger.
Interpretation
Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an indicator. These comments refer to bands displayed on prices. As with moving average envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper- and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the bands varies based on the volatility of the prices. During periods of extreme price changes (i.e., high volatility), the bands widen to become more forgiving. During periods of stagnant pricing (i.e., low volatility), the bands Narrow to contain prices. Following are characteristics of Bollinger Bands.
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Sharp price changes tend to occur after the bands tighten, as volatility lessens. When prices move outside the bands, a continuation of the current trend is implied Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands call for reversals in the trend. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets.
MACD Overview
The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD was developed by Gerald Appel, publisher of Systems and Forecasts. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell opportunities. (Apple specifies exponential moving averages as percentages. Thus, he refers to these three moving averages as 7.5%, 15 and 20% respectively.)
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Interpretation
The MACD proves most effective in wide-swinging trading markets. There are three popular ways to use the MACD: crossovers, overbought/oversold conditions, and divergences. Crossovers The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero.
Overbought/Oversold Conditions The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. MACD overbought and oversold conditions exist vary from security to security.
Divergences
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An indication that an end to the current trend may be near occurs when the MACD diverges from the security. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs. Both of these divergences are most significant when they occur at relatively overbought/oversold levels.
MOMENTUM Overview
The Momentum indicator measures the amount that a security's price has changed over a given time span.
Interpretation
The interpretation of the Momentum indicator is identical to the interpretation of the Price ROC. Both indicators display the rate-ofchange of a security's price. However, the Price ROC indicator displays the rate-of-change as a percentage whereas the Momentum indicator displays the rate-of-change as a ratio.
VOLUME
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Overview
Volume is simply the number of shares (or contracts) traded during a specified time frame (e.g., hour, day, week, month, etc). The analysis of volume is a basic yet very important element of technical analysis. Volume provides clues as to the intensity of a given price move.
Interpretation
Low volume levels are characteristic of the indecisive expectations that typically occur during consolidation periods (i.e., periods where prices move sideways in a trading range). Low volume also often occurs during the indecisive period during market bottoms. High volume levels are characteristic of market tops when there is a strong consensus that Prices will move higher. High volume levels are also very common at the beginning of new trends (i.e., when prices break out of a trading range). Just before market bottoms, volume will often increase due to panicdriven selling. Volume can help determine the health of an existing trend. A healthy uptrend should have higher volume on the upward legs of the trend, and lower volume on the downward (corrective) legs. A healthy downtrend
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usually has higher volume on the downward legs of the trend and lower volume on the upward (corrective) legs.
RATE OF CHANGE (ROC) Rate of change measures the rate at which prices rise or fall. It is based on the principle that prices usually rise and fall at the fastest pace well ahead of their peak and before their trough respectively. 10 Day ROC The concept of ROC can be explained with the help of a single example. A ball thrown into the Air generally shoots up with speed but subsequently shows down considerably before it turns to come down again. The loss of upward momentum that occurs before the ball changes course can be seen in the stock market also. Before peaking out, share process registers a noticeable decrease in momentum.
DA Y 1 1 2 3 4 5 6 7 8 9 10 11 THE CALCULATION OF 10 DAY RATE OF CHANGE SHARE SHARE PRICE 10DAYS ROC 10 DAYS PRICE AGO AGO 2 3 (4) =(2)/(3)
2079.5 2065.05 2106.05 2165.2 2151.1 2178.1 2189.35 2160 2125 2197 2247.95
2079.5
1.081
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12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
2343 2421.35 2448 2252.95 2270 2205.15 2119 2229.95 2250.5 2206 2242.2 2167 2148.65 2151 2240.05 2309.25 2328.6 2357.7 2292
2065.05 2106.05 2165.2 2151.1 2178.1 2189.35 2160 2125 2197 2247.95 2343 2421.35 2448 2252.95 2270 2205.15 2119 2229.95 2250.5
1.135 1.150 1.131 1.047 1.042 1.007 0.981 1.049 1.024 0.981 0.957 0.895 0.878 0.955 0.987 1.047 1.099 1.057 1.018
The concept of ROC can be explained with the help of a single example. A ball thrown into the air generally shoots up with speed but subsequently shows down considerably before it turns to come down again. The loss of upward momentum that occurs before the ball changes course can be seen in the stock market also. Before peaking out,
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share process registers a noticeable decrease in momentum. To measure the rate of change, the ratio of the most recent closing price to the price for a certain number of days in the past is worked out. To calculate a 10 days ROC, the latest closing price is divided by the closing price of the scrip 10 days ago. If the latest price is higher than that of the historical price for the ten previous days, the ROC value will be above the line 1 and vice versa. In the following table an example of 10 days ROC is explained. Under column 2 the share price movement of a company is provided for 20 days while under column 3 the prices ruling 10 days ago has been taken. In the last column, the ROC values are arrived at by dividing the current days price by the price 10 days ago. The ROC values are available from the 11th day only as for the first 10 trading days. The 10 days back share prices are not available. It is worth noting that the share prices are available only on the trading that actually took place in the market. Therefore, the ROC is computed for 10 trading days and not 10 calendar days. The share price has been increased by Re. 1 on every day trading day from day 1 to day 15. However, the ROC declined continuously from the 11th day to 15th day, though the share price in rupees terms increased.
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This indicates that though there was a share price rise in absolute terms, in percentage terms the rise in share price declined during that period. If the ROC line is above 1; the current day price is higher than that of 10 days ago. If the ROC line is above 1 and rising; the difference between the current day price and 10 days back price grows at an increasing rate (bullish signal). If ROC line is above 1, but declining; the price rises at a lower rate than the earlier growth rate (bearish signal) If the ROC line is below 1, the current days price is lower than the price 10 days ago. If the ROC line is below 1 and falling, the difference between 10 days price and 10 days back price grows at a faster rate (bearish signal). If the ROC line is below 1, but rising, the rate of decline slows down (bullish signal). The ROC line is so constructed that it is always a step ahead of the price movement. It gives an advance signal before the share price line takes a reversal direction.
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Relative Strength Index Relative Strength Index (RSI) us is one of the very few sophisticated Oscillators used in technical analysis. The others which we have already discussed in the previous issues are stochastic and MACD. The rate of change and momentum are some of the widely used simple oscillators. There are some flaws like erratic movement due to sudden drop or rise in the price movement even in a single trading day in the usage of simple oscillators. For instance, in a 10 day momentum, a sharp advance or decline ten days back can cause sudden shifts in momentum line even if there is a marginal or no change in current prices. Therefore, it is necessary to reduce these distortions and smoothen the oscillator indicator distortions and smoothen the oscillator indictor distortion and smoothen the oscillator indicator. The other problem in simple oscillators is that there is no specified range on vertical scale. Mainly to address these two major problems of simple oscillators RSI was developed by J. Welles Wilder, Jr. in 1978. RSI indicator provides not only the required smoothing but also 0 and 100 as lower and upper limits respectively for its vertical scale. RSI is calculated using the following formula. RSI=100 {100 / (1+RS)} Where RS = Average of n periods price gains Average of n periods price losses
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7 day RS value = (8/7) / (4/7) = 1.143 / 0.571=2 RSI= 100 {100 / (1+RS)} = 100 {100 / (1+2)} =100- 33.33 = 66.67. The RSI value for the seventh day is 66.67. For calculating the RSI value for the eighth day, we have to exclude the first day closing price and include the price on the eighth day. We can calculate RSI for any time period. The most widely used period is 14 days. Some technical analysts also use lesser time periods like 5 - day, 7 day, 9 day to get the quicker signals. Like I any other Oscillators, shorter the time period, the more sensitive and volatile the RSI becomes. Therefore, to reduce the misleading signals Wilder recommended and used a 14 day period for constructing RSI.
RSI CALCULATION CHANGE IN PRICE OVER DAY 1 2 3 4 5 6 7 TOTAL CLOSING PRICE 43 45 44 46 45 43 47 PREVIOUS DAY GAIN 0 2 0 2 0 0 4 8 LOSS 0 0 1 0 1 2 0 4
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Interpretation:
The RSI values are plotted on chart with a vertical scale of 0 to 100. If the RSI moves above the value 70, it is considered as overbought. If the RSI moves below the value 30, it is treated as an oversold zone.
In other words, there may be down trends in the price after the RSI moving above the 70 level and prices may recover and look up after the RSI falls below 30 level. Generally, RSI indicator crosses the 70 level much before the share price touches the peak. Similarly, RSI line goes below the 30 level well ahead of price lifting the bottom. Hence, RSI gives an advance signal for reversal share price movements.
Failure swings: we can see the failure in rallies and also in declines when the RSI is above 70 and 30 respectively. Failure A in rally when the RSI rises above 70 rises again but fails to reach the level 70 and below the prior lower level. This is a clear sell signal. Failure at bottom of
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when the RSI in a downtrend. Failure B explains the failure in decline when fails to set new low and starts an uptrend to exceed previous peak.
Divergence: According to Wilder, divergence is the most indicative character of the RSI which gives a warning signal for likely reversal in share movement. Hence, the divergence is between the RSI line and the share price. For instance, if the RSI line is falling below from the level of 80 to 70 and a same time the share price is still in an uptrend, it gives as indication that the share price is also likely to reverse its direction shortly. This divergence gives a sell signal. Similarly, we get a buy signal when the RSI line is moving up below the level 30 and at the same time the share price is still continuing in a downtrend.
The RSI indicator simply means Buy, when the RSI line is crossing up through the 50 level and Sell, when the RSI line is crossing down through the 50 level. We can also identify the chart patterns like triangles, flags, rectangles in the RSI line and interpret the same way as in price chart. Support and Resistance levels also can be drawn for RSI charts.
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These Oscillators are quite useful only for short terms investors and traders. These are not useful for long term investors, because they cannot simply sell their shares for the simple reason that RSI has moved above the 70 level. The first entry of RSI into the overbought zone is only a first warning signal. One has to wait for further confirmations before really liquidating his portion
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State Bank of India- History The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July 1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their amalgamation as the Imperial Bank of India on 27 January 1921. 1955 - On 1st July State Bank of India was constituted under the State Bank of India Act 1955, for the purpose of taking over the undertaking and business of the Imperial Bank of India. The Imperial Bank of India
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was founded in 1921 under the Imperial Bank of India Act 1920. The Bank transacts general banking business of every description including, foreign exchange, merchant banking and mutual funds. Management of - SBI Name Pratip Chaudhuri A Krishna Kumar Ashok Jhunjhunwala S Venkatachalam G D Nadaf Parthasarthy Iyengar Subir Vithal Gokran Deepak Ishwarbhai Amin Name Hemant G Contractor Diwakar Gupta Dileep C Choksi D Sundaram Rashpal Malhotra D K Mittal Jyoti Bhushan Mohapatra Designation Chairman / Chair Person Managing Director Director Director Director Director Director Non Official Part Time Director Designation Managing Director Managing Director Director Director Non Official Part Time Director Director Director
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CONCLUSION:Technical Analysis of State Bank of India: 3 Years data taken (1st-Jan-2009 to 27th-Feb-2012) Bar Chart
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Line Chart
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When 50 DMA crosses 200 DMA in Upside that time In Technical words its called as GOLDEN CROSS its a strong bullish signal
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As per charts SBI has strong support @ 2040 & 1880 & Resistance @ 2190, 2390 & 2450. Whereas RSI is crossing up 50 level which Indicate Buy Signal. and if we see 10 days ROC is above 1 but declining the price rises at lower rate than the earlier growth rate which indicate bearish signal. But if we take 3 years data and calculate ROC then we can see ROC line is above 1 and rising; the difference
between the current day price and 10 days back price grows at an increasing rate (bullish signal)
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Recommendation: - Buy SBI at current level i.e. 21002130, Short term Target 2190 & 2390, Stop Loss @ 2040 Long Term Target above 2390 2540 and above this level 2600 - - 2700 Targets is there, Stop Loss @ 2040
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BIBLIOGRAPHY www.investopedia.com www.onlincetradingconcepts.com www.nseindia.com www.bseindia.com And Help taken by my office colleague Mr Chandrashekhar Khamkar (Reliance Securities) who has good knowledge of technical analysis.
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