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Technical analysis

2019

INTRODUCTION :-

People enter financial market with the intention of making profits. The main purpose can be
fulfilled when they can analyse the future course of action, based on certain available data. There are
basically two methods of analysing investment opportunities in the securities market i.e. Technical
analysis and Fundamental analysis.

EQUITY ANALYSIS.

ENVIRONMENT & ECONOMICAL ANALYSIS.

FUNDAMENTAL TECHNICAL

ANALYSIS ANALYSIS

Fundamental analysis deals with analysing publicly available financial data of the company.
Fundamental analyst will dig into the details of Profit/Loss statement, balance sheet and cash flows of
the company. He will carry out ratio analysis, trend analysis, common size statement analysis, will
meet the management to understand future roadmap, will meet suppliers and customers to understand
demand and supply scenario of the product in the market, will analyze competitor’s performance to
understand real happenings in the industry. Based on different valuation methods and goodwill of the
company, he will then forecast the future price of the security.

Technical analysis involves clubbing all information of the securities like price, volume and
open interest and applying various indicators (which are based on price/volume/time), applying
classical theories like DOW THEORY, ELLIOTT WAVE THEORY, GANN THEORY, some of the
modern theories like NEO WAVE etc. in order to predict the future course of action for the security
with the certain probability attached to the same. Technical analysis can be defined as an art as well as
science of analysing present trend and forecasting future performance based on examination of past
price movements. Technical analysis is nothing to do with astrology. It is clearly based on analysis of
demand and supply of all securities in the market. Technical analysis can be applied on all asset classes
which are traded in the market

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TECHNICAL ANLYSIS:
“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 stock’s 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 identifying 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.

The best part of technical analysis is that it can serve the purpose of most of the market
participants, whether long term or short term speculators, because of the fact that technical studies can
be applied to different time frames, ranging from 1 minute, 5 minute, 10 minute, 15 minute, 30 minute,
1 hour, 2 hour, daily, weekly, monthly, quarterly, semi annually, and annually data.

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History of Technical Analysis:

Technical Analysis as a tool of investment for the average investor thrived in the late
nineteenth century when Charles Dow, then editor of the Wall Street Journal, proposed the Dow
theory. He recognized that the movement is caused by the action/reaction of the people dealing in
stocks rather than the news in itself.

Technical analysis is a method of evaluating securities by analyzing the statistics generated by


market activity, such as past prices and volume. Technical analysts do not attempt to measure a
security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest
future activity. Just as there are many investment styles on the fundamental side, there are also many
different types of technical traders. Some rely on chart patterns, others use technical indicators and
oscillators, and most use some combination of the two. In any case, technical analysts' exclusive use of
historical price and volume data is what separates them from their fundamental counterparts. Unlike
fundamental analysts, technical analysts don't care whether a stock is undervalued the only 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.

Basic premises of technical analysis:

1. Market prices are determined by the interaction of supply & demand forces.

2. Supply & demand are influenced by variety of supply & demand affiliated

factors both rational & irrational.

3. These include fundamental factors as well as psychological factors.

4. Barring minor deviations stock prices tend to move in fairly persistent trends.

5. Shifts in demand & supply bring about change in trends.

6. This shift s can be detected with the help of charts of manual & computerized action, because of

the persistence of trends & patterns analysis of past market data can be used to predict future prices

behaviors.

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ASSUMPTIONS OF TECHNICAL ANALYSIS:-

The field of Technical analysis is based on three basic assumptions, which are as follow:

I. THE MARKET DISCOUNTS EVERYTHING:


Technical analysis assumes that any given point in time, market prices would reflect the most
present material information of the company. Market prices are the reflection of mass psychology,
collective thinking of the crowd and pulses of human emotions. Price is the barometer of the collective
thinking of fundamentalists, technical analysts, economists, traders, speculators , institutional investors
(mutual fund, hedge funds, insurance companies, pension funds, corporates), treasury department of
the companies etc. when all participants enter market with mindsets and with different reasons of
buying and selling of the stock, the tug of war will be won by the participant with some “material non-
public information” that will lead the price rally in that direction. So, it is believed that the company’s
fundamentals, along with economic factors and market psychology, are all priced into the stock
removing the need to separately consider all factors.

II. PRICES MOVES IN TRENDS :


The very famous saying in technical analysis is “TREND IS YOUR FRIEND”. It is assumed
that most of the time, prices moves in trend. The trend can either be up or down or sideways. Once the
trend has been established, the future price movement is more likely to be in the same direction, till the
time prices change the trend.
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III. HISTORY TENDS TO REPEAT ITSELF:
As discuss in the first point, market prices are the reflection of mass psychology, collective
thinking of the crowd and pulses of human emotions. It is seen in the subject of behavioural finance
too that participants behave indifferently since ages, even in different market conditions. Predicting the
effect of participant’s thinking on the future price is been possible to the greatest extent using different
price patterns. High success ratio of the patterns help to prove the statement that history tend to repeat.

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ADVANTAGES OF TECHNICAL ANALYSIS:

1. UNIVERSAL APPLICABILITY:
Technical analysis has universal applicability. Its use is not only restricted to stocks. It is
applicable to all tradable asset classes like commodities, stock, futures, indicies, bond prices,
currencies etc.
2. FOCUS ON PRICE:
A famous saying in technical analysis is “Price is God”. Stock market prices one of the leading
indicators of the economy. It leads the market by more than 6 months. By focusing on the price,
technical analyst focuses on the future. To track the market, it makes sense to directly track the price
movement. Expect the vent like “ACT OF GOD”, almost all events are priced in.
3. DEMAND AND SUPPLY ANALYSIS:
The purpose of every analytical method is to understand which security will perform better
going forward. The security will move only on the basis of demand and supply. Technical studies help
to understand that crux by analysing price behaviour of securities.
4. SUPPORT AND RESISTANT:
Technical analysis provides 2 price levels, which are support and resistance. Support is the
level where demand overweigh supply and prices pullback from that level. Resistance is the level
where supply overweigh demand and prices throwback from that level. These level help to trade in
market. Also when prices break through these levels, one may expect directional rally going forward.

5. HISTORICAL PRICE CLARITY:


It is very easy to look at past price moves on charts than in tabular form. Visual reading is very
comfortable than tabular reading. Looking at chart gives more comfort to understand whether the
security is trading at bottom, mid or at the top. It is easy to identify:
a. market reactions before and after important events.
b. Past and present volatility.
c. Historical volumes and trading levels.
d. Relative strength of security with index.

6. HELP TO ENTER AND EXIT SECURITY:


Technical analysis helps in tracking a proper entry point. Fundamental analysis is used to
decide what to buy and technical analysis is used to decide when to buy. Timing in this context play a
very important role in performance.

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TOOLS AND INTUMENTS USED IN TECHNICAL ANALYSIS:

1. 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.
2. OPEN - This is the price of the first trade for the period (e.g., the first trade of the day). When
analysing daily data, the Open is especially important as it is the consensus price after all interested
parties were able to "sleep on it."
3. 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).
4. 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).
5. 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.
6. 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.
7. OPEN INTEREST - This is the total number of outstanding contracts (i.e., those that have not
been exercised, closed, or expired) of a future or option. Open interest is often used as an indicator.
8. 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).
9. ASK- This is the price a market maker is willing to accept (i.e., the price you will pay to buy the
security).

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PRICE CHARTS:

Charts are the basic working tool for technical analysts. Charts means the graphical
representation of past price moves of any particular security. It plots the complete price movement of
the security over selected period of time (intraday, daily, weekly, monthly, quarterly, yearly etc
Typically x axis represents time and y axis represents price of the security. By plotting a
stock’s price over a period of time, we end up with a pictorial representation of any stock’s trading
history. There are different types of price charts representing different price data of security. They are:
1. LINE CHART.
2. BAR CHART
3. CANDLESTICK CHART.
4. POINT AND FIGURE CHART.

1. LINE CHART:
Line chart are formed by connecting the dots which represents closing price of that particular
time frame. It means that if a trader is looking at daily chart, then closing price of the trading days will
be plotted. Similarly, if someone is looking at weekly or monthly chart, then closing price of that week
or month will be plotted. Those plots are then connected with a line. Such charts are known as line
charts. Line charts are very important in analysing the trends and also usefull in checking breakouts in
case of pattern system.

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.
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2. BAR CHART:

Weakness of line chart is that it reflects only the closing price of that particular security and
completely ignores the rest price movement in that selected phase. Bar chart helps to overcome that
particular weakness. Bar chart shows 4 pieces of security information: opening, high, low and closing
price over selected period. Each time interval is represented by one chart and every bar represents all 4
sets of data.

vertical line shows the trading range of that day. Then top of this vertical line represents the
highest price at which the security traded on that day; the bottom of the bar represents the lowest
trading price of the day. A longer line denotes a wider trading range during the day. Likewise, a short
bar means that spread between the highest price during the day and lowest price during the day was
small. A small tick on the left side of the bar indicates the opening price for the day. A small tick on
the right side of the bar indicates the closing price for the day.

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3. Candlestick charts:

Candlestick charts originated in japan. This charting method was used as early as the mid-
1600’s to trade rice futures in the Japanese. Candlestick charts are similar to bar charts. Instead of
vertical line in bar charts, candlesticks considers box (rectangle) to show open and close. This
rectangular body is called as “REAL BODY” of the candle.Colour of the real body depends upon the
open and close of the security. If opening price is lower and closing price is higher, then the body
colour is white/green. If opening price is higher and closing price is lower, then the colour of the body
is black/red. Price spikes above and below the open and close are called “SHADOWS”. Price extreme
on the higher side of the candle is called ‘upper shadow’ whereas price extreme at the lower side of the
candle is called ‘lower shadow’. This how the name ‘candlestick’ came into existence.

Because candlestick chart contains all information that a bar chart contains, all of the technical
tools that are used with charts contains can also be used with candlestick charts. Candlesticks are
formed in variety of shapes and sizes. Lot of research is developed on the colour and size of individual
candlesticks to signal trades.

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IV. POINT AND FIGURE CHART:

The point-and-figure chart records price data using a very different technique than line, bar,
and candlestick charts. At first it may appear that the construction of these charts is somewhat tedious.
But it provides an interesting and accurate method of price analysis. Construction of a point-and-figure
chart is very simple because only prices are used. Even then, only the prices that meet the ‘box’ size
and ‘reversal’ size are included. Finally, the chart reflects the high and low of the period, whenever it
is important. Point and figure charts consists of columns of X’s and O’s that represent filtered price
movements. X-columns represent rising prices and O-columns represent falling prices. Each price box
represents a specific value that price must reach to warrant an X or an O. Time is not a factor in point
and figure charting. These charts evolve as prices move. No movement in price means no change in
the point and figure chart. In classic 3-box reversal charts, column reversals are further filtered
requiring a 3-box minimum to reverse the current column. The 3-box Reversal Method is the most
popular point and figure charting method.

Summary of charts:

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CANDLESTICK PATTERNS & ANALYSIS:


One cannot ignore that investor’s psychologically driven forces of fear; greed and hope greatly
influence the stock prices. The overall market psychology can be tracked through candlestick analysis.
More than just a method of pattern recognition, candlestick analysis shows the interaction between
buyers and sellers. Japanese candlesticks offer a quick picture into psychology of short term trading,
studying the effect, not the cause. Therefore, if candlestick analysis is combined with other technical
analysis tools, candlestick pattern analysis can be very useful way to select entry and exit points.
Candlestick analysis is based on single candle to combination of candles.

A. One candle pattern:


In Japanese candlesticks, these patterns are known as ‘umbrella lines’. There are mainly two types of
umbrellas, the HANGING MAN and the HAMMER. The structure of the candlestick is that it has a
small real body and long shadow at the bottom (or at the top). If the candle comes at the bottom of
the trend, it is known as hammer and if the candle comes at the top of the trend, it is known as
hanging man.
I. HAMMER:
Hammer is a one candle pattern that occurs in a downtrend. This is the time when bulls try to
step into the rally. It is so named because it hammers out the bottom. Conditions need to be watched
out, while identifying hammer pattern.

PATTERN PSYCHOLOGY:- The market has been in a downtrend, so there is an air of


bearishness. The price opens and starts to trade lower. However, the sell-off is abated and market
returns to high for the day as the bulls have stepped in. They start bringing the price back up
towards the trading range. This creates a large lower shadow with a small body at the top of
formation

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II. HANGING MAN:


Hanging man is one candle pattern that occurs in an uptrend. This signifies a potential topping
out of the present up move. This is the time when bears try to step into the rally. Conditions need to
be watched out, while identifying hanging man pattern.

PATTERN PSYCHOLOGY:- The market has been in an uptrend so there is a clear bullish sentiment
in the market. The price opens positive and starts to trade higher. However, the buying fizzles away
and the market returns to low for the day as the bears have stepped in. they start bringing the price
back down towards the bottom of the trading range. This creates a larger lower shadow with a small
body at the top of formation.

III. SHOOTING STAR:

Shooting star is a one candle pattern that occurs in an uptrend. This is upside down of
hanging man. This too signifies a potential topping out of the present up move. This is the time when
bears try to step into the rally, which is clearly evident from the formation of the candle itself.
Conditions need to be watched out, while identifying shooting star pattern.

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PATTERN PSYCOLOGY: The market has been in an uptrend, so there is clear bullish sentiment in
the market. The price opens positive and starts to trade higher. However, the buying fizzles away and
market returns to low for the day as the bears have stepped in. They start bringing the price back
down towards the bottom of the trading range. This creates a larger higher shadow with small body at
the bottom of the formation.

IV. INVERTED HAMMER:


Inverted hammer is one candle pattern that occurs in a downtrend. This is upside down of
hammer. This too signifies a potential booming out of the present down move. This is the time when
bulls probably try to step into the rally. Conditions need to be watched out, while identifying inverted
hammer pattern.

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PATTERN PSYCHOLOGY: After a downtrend has been in effect, the atmosphere is bearish. The
price opens and starts trading higher. Bulls have stepped in, but the existing sellers knock the price
back down to lower end of trading range. If price maintains strong after the inverted hammer day, the
signal is confirmed.
B. DOJI:
Doji is a single candle where opening price and the closing price are same (almost same). It
basically represents confusion or indecisiveness in the market between bulls and bears. It also serve as
a reversal pattern, if the following day candle is decisive in action.

The diagram clearly shows the indecisiveness. Here, open and close price are at the same level.
Higher shadow shows high of the day and lower shadow shows low of the day. Importance of doji is
more infrequent on charts of the security. If it frequently appears on the chart, then the doji turns out
be less important.

DOJI AT TOPS AND BOTTOMS:

Doji at tops and bottoms signify reversal of the existing trend. As it is the sign of
indecisiveness, when spotted at the top or bottom, signifies the possible trend reversal. The
indecisiveness doesn’t necessarily mean reversal all the time. But it shows possible pause of the
present trend. If the following candle shows the trend reversal with decisiveness, the reversal gets
confirmed with high probability. One needs to consider doji as a warning sign and be ready for
surprise.

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C. TWO CANDLE PATTERNS:


I. BULLISH ENGULFING:
Bullish engulfing pattern turns up at the end of the downtrend, where the bullish green candle
engulfs (covers) the previous red candle completely. This signifies that the buyer are overwhelming
the sellers.

This is one of the major reversal patterns which is generally found at the point of reversal. It is
formed when the small real body is completely eclipsed by the next big green candle. It basically
opens below the low of the previous day and closes above the high of the previous day.

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II. BEARISH ENGULFING PATTERN:

Bearish engulfing pattern comes at the end of up trend, where the bearish red candle engulfs
the previous green candle completely. This signifies that the sellers are overwhelming the buyers.

III. BULLISH PIERCING:

Bullish piercing pattern consists of 2 candles, one is red and the another is green, which opens
gap down and pullbacks beyond mid of the red candle. It is clear reversal pattern. The atmosphere
becomes bearish once a strong downtrend has been in effect. The prices goes down. Bears may move
the price even further but before the day ends, bulls enter and bring a dramatic change in price in the
opposite direction. They finish near the high of the day. The move has almost negated the price decline
of the previous day, as candle pierce the previous bearish candle till its half way. More buying the next
day will confirm the move.

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IV. BEARISH PIERCING:

Bearish piercing pattern consists of 2 candles, one is greater and the another is red, which
opens gap up and pullbacks beyond mid of the green candle. The environment is clearly bullish as the
trend is up. The price opens gap up, which even pushes the positive sentiments, but before the day
ends bears enter in a big way and bring a dramatic change in price in the opposite direction. They
finish near the low of the day. The move have almost negated the price rise of the previous day, as
candle pierce the previous bullish candle till more than its half way. More selling on next day will
confirm the pattern.

V. BULLISH HARAMI:
‘Harami’ in Japanese language means pregnant lady. As clearly evident, a big red candlestick,
which is followed by the small green candlestick at the bottom of the trend is bullish harami pattern.
The small candle is covered within the large candle, creating harami form. It is a reversal pattern. Its
presence indicates that the previous downtrend is over.

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VI. BEARISH HARAMI


As clear evident, a big green candlestick, which is followed by the small red candlestick at the
top of the trend is bearish Harami pattern. The small candle is covered within the large candle, creating
Harami form. It is prominent reversal pattern. Its presence indicates that the previous uptrend is about
to over.

D. THREE CANDLE PATTERNS:


I. THREE WHITE SOLDIES:
‘Three white soldiers’ is a downtrend reversal pattern, found at the bottom of the trend. One of
the highly reliable patterns, three white soldiers shows decisive buying and potential change in trend
reversal. In the persistent down trend, prices opened gaped down, giving confidence to bears to
continue selling. Suddenly selling is absorbed and prices start rising, leaving bears in confusion.
Trading day closes at the high of the day with huge volume at the bottom of the trend. Bulls have
entered the market in big way. Second day bulls continue buying. Third day also follows the same way
and bulls gain complete control on the move and lead the rally.

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II. THREE BLACK SOLDIERS:

‘Three black soldiers’ is an uptrend reversal pattern, found at the top of the trend.
One of the highly reliable patterns, three black soldiers shows decisive selling and potential change in
trend reversal. In the persistent up trend, prices opened gapped up, showing decisive buying by bulls.
Suddenly demand is absorbed prices starts falling, absorbing entire supply. Trading closes at the low
of the day with huge volume at the top of the trend. Bears enter in big way and leaving no room for
bulls to think. Second day, bears continue selling and prices continue to move in south rally. Third day
also follows the same way and bears gain complete control on the down move.

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.

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I. HEAD AND SHOULDERS:


This is one of the most popular and reliable chart patterns in technical analysis. Head and
shoulders is a reversal chart pattern that when formed, signals that the security is likely to move
against the previous trend. As you can see , there are two versions of the head and shoulders chart
pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an
upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also
known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to
signal a reversal in a downtrend.
HEAD AND SHOULERS TOP AND BOTTOMS ARE AS FOLLOWS:

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.

II. Double tops and bottom:


This chart pattern is another well-known pattern that signals a trend reversal it is considered
to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend
and signal to chartists that the trend is about to reverse. The pattern is created when a price movement
tests support or resistance levels twice and is unable to break through. This pattern is often used To
signal intermediate and long-term trend reversals.

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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.

III. TRIPLE TOPS AND BOTTOMS:


Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis.
These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in
a similar fashion. These two chart patterns are formed when the price movement tests a level of
support or resistance three times and is unable to break through; this signals a reversal of the prior
trend.

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IV. CHANNELS:
It is a kind of consolidation of the price in the narrow range. This can be seen in any phase of
the market. Channels can be of different directions like up channel, down channel and sideways
channel. It is difficult to tag price formation as channel unless few pattern failures come in. Channel is
formed only on failure of double tops, double bottom, triple tops, triple bottom. When price continue
to respect support and resistance over some period of time, it forms basis for channel. Upper line of the
channel acts as ongoing resistance and lower line of the channel acts as ongoing support. Role reversal
of support and resistance comes into action once either side of the channel is taken out decisively.

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V. ROUNDED TOPS:

Rounded top is one of the reliable topping out pattern, happening at the top of the trend.
This pattern shows distribution and potential fall in prices going forward. In this pattern, prices
gradually shift from bullish to bearish sentiment. One needs to remember that it is very difficult to
identify rounding formation at the initial stage due to confusion, extreme bullishness in sentiments and
slow distribution of position. The only way to get hint is the volume behaviour. Prices stops rising and
starts being sideways. During that phase, volume initially dries up and then starts increasing at the
level where price starts falling. Volume decreases when price increases and volume increases when
price decreases.

VI. ROUNDED BOTTOM:


As the name suggests, it forms curve formation at the bottom of the trend. Prices stops falling
in a persistent down trend and accumulation starts. Smart money silently captures stock. Price
gradually shifts from bearish sentiments to bullish sentiment. Capturing the early reversal is possible
by tracking volume activity. Here, again volume plays a vital role in entering the formation. Smart
money participation is less when prices fall during rounding bottom and activity increases when prices
start moving higher. Volume decreases when price decreases and volume increases when price
increases.

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VII. 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.

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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VIII. FLAGS AND PENNANT:


These two short-term chart patterns are continuation patterns that are formed when there is a
sharp price movement followed by a generally sideways price movement. This pattern is then
completed upon another 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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TRENDS IN TECHNICAL ANALYSIS:

The Use of Trends:


One of the most important concepts in technical analysis is that of trend. The meaning in
finance isn't all that different from the general definition of the term - a trend is really nothing more
than the general direction in which a security or market is headed. Take a look at the chart below:

There are lots of ups and downs in this chart, but there isn't a clear indication of which
direction this security is headed.
Unfortunately, trends are not always easy to see. In other words, defining a trend goes well
beyond the obvious. In any given chart, you will probably notice that prices do not tend to move in a
straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the
movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a
series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.

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.

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Types of Trends:
There are three types of trend:
1. Uptrend.
2. Downtrend.
3. Sideways/ horizontal trend.

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 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 long-term 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 at Figure to get a sense of how these three trend lengths might look.

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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 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.

The Importance Of Trend:


It is important to be able to understand and identify trends so that you can trade with rather than
against them. Two important sayings in technical analysis are "the trend is your friend" and "don't
buck the trend", illustrating how important trend analysis is for technical traders.

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IMPORTANCE OF VOLUME:

What Is Volume?
Volume is simply the number of shares or contracts that trade over a given period of time,
usually a day. The higher the volume, the more active the security. To determine the movement of the
volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any
chart. Volume bars illustrate how many shares have traded per period and show trends in the same way
that prices do.
Why Volume Is Important?
Volume is an important aspect of technical analysis because it is used to confirm trends and
chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more
relevant move than a similar move 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.

Volume Precedes Price:


Another important idea in technical analysis is that price is preceded by volume. Volume is
closely monitored by technicians 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.

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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.

Round Numbers and Support and Resistance:-


One type of universal support and resistance that tends to be seen across a large number of
securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in
support and resistance levels because they often represent the major psychological turning points at
which many traders will make buy or sell decisions. Buyers will often purchase large amounts of stock
once the price starts to fall toward a major round number such as $50, which makes it more difficult
for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a
round number peak, making it difficult to move past this upper level as well. It is the increased buying
and selling pressure at these levels that makes them important points of support and resistance and, in
many cases, major psychological points as well.
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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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The Importance Of Support And Resistance:


Support and resistance analysis is an important part of trends because it can be used to make
trading decisions and identify when a trend is reversing. Support and resistance levels both test and
confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price
of the share remains between these levels of support and resistance, the trend is likely to continue. It is
important to note, however, that a break beyond a level of support or resistance does not always have
to be a reversal.

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.

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STATISTICAL TOOLS:
 SIMPLE MOVING AVERAGE.
 RELATIVE STRENGTH INDEX.
 RATE OF CHANGE.

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 of time.
By plotting a security's average price, the price movement is smoothed out. Once the day-to-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. Simple Moving Average (SMA):
This is the most common method used to calculate the moving average of prices. It simply
takes 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 and the likelihood that it will reverse.

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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 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.

2. Linear Weighted Average:


This moving average indicator is the least common out of the three and is used to address the
problem of the equal weighting. The linear weighted moving average is calculated by taking the sum
of all the closing prices over a certain time period and multiplying them by the position of the data
point and then dividing by the sum of the number of periods. For example, in a five-day linear
weighted average, today's closing price is multiplied by five; yesterday's by four and so on until the
first day in the period range is reached. These numbers are then added together and divided by the sum
of the multipliers.

3. Exponential Moving Average (EMA):


This moving average calculation uses a smoothing factor to place a higher weight on recent
data points and is regarded as much more efficient than the linear weighted average. Having an
understanding of the calculation is not generally required for most traders because most ch.arting
packages do the calculation for you. The most important thing to remember about the exponential
moving average is that it is more responsive to new information relative to the simple moving average.
This responsiveness is one of the key factors of why this is the moving average of choice among many
technical traders. A 15-period EMA raises and falls faster than a 15-period SMA. This slight
difference doesn’t seem like much, but it is an important factor to be aware of since it can affect
returns.

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Major Uses of Moving Averages:


Moving averages are used to identify current trends and trend reversals as well as to set up
support and resistance levels. Moving averages can be used to quickly identify whether a security is
moving in an uptrend or a downtrend depending on the direction of the moving average. When a
moving average is heading upward and the price is above it, the security is in an uptrend. Conversely,
a downward sloping moving average with the price below can be used to signal a downtrend.
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.

Moving averages are a powerful tool for analysing 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.

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Technical Indicators:
A. ACCUMULATION/DISTRIBUTION:
Overview:
The Accumulation/Distribution is a momentum indicator that associates changes in price and
volume. The indicator is based on the premise that the more volume that accompanies a price move,
the more significant the price move.

Interpretation:
The Accumulation/Distribution is really a variation of the more popular On Balance Volume
indicator. Both of these indicators attempt to confirm changes in prices by comparing the volume
associated with prices. When the Accumulation/Distribution moves up, it shows that the security is
being accumulated, as most of the volume is associated with upward price movement. When the
indicator moves down, it shows that the security is being distributed, as most of the volume is
associated with downward price movement. Divergences between the Accumulation/Distribution and
the security's price imply a change is imminent. When a divergence does occur, prices usually change
to confirm the Accumulation/Distribution. For example, if the indicator is moving up and the security's
price is going down, prices will probably reverse.

B. BOLLINGER BANDS:
Overview:
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.

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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.
• 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.

C. COMMODITY CHANNEL INDEX:


Overview:
The Commodity Channel Index ("CCI") measures the variation of a security's price from its
statistical mean. High values show that prices are unusually high compared to average prices whereas
low values indicate that prices are unusually low. Contrary to its name, the CCI can be used effectively
on any type of security, not just commodities.

Interpretation:
There are two basic methods of interpreting the CCI: looking for divergences and as an
overbought/oversold indicator.
• A divergence occurs when the security's prices are making new highs while the CCI is failing to
surpass its previous highs. This classic divergence is usually followed by a correction in the security's
price.
• The CCI typically oscillates between 100. To use the CCI as an overbought/oversold indicator,
readings above +100 imply an overbought condition (and a pending price correction) while readings
below -100 imply an oversold condition (and a pending rally).

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D. ENVELOPES (TRADING BANDS):


Overview:
An envelope is comprised of two moving averages. One moving average is shifted upward and
the second moving average is shifted downward.

Interpretation:

Envelopes define the upper and lower boundaries of a security's normal trading range. A sell
signal is generated when the security reaches the upper band whereas a buy signal is generated at the
lower band. The optimum percentage shift depends on the volatility of the security--the more volatile,
the larger the percentage. The logic behind envelopes is that overzealous buyers and sellers push the
price to the extremes (i.e., the upper and lower bands), at which point the prices often stabilize by
moving to more realistic levels. This is similar to the interpretation of Bollinger Bands.

E. 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. (Appel
specifies exponential moving averages as percentages. Thus, he refers to these three moving averages
as 7.5%, 15%, and 20% respectively.)

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.

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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:
A 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.

F. 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-of-change 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.

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G. ON BALANCE VOLUME:
Overview:
On Balance Volume ("OBV") is a momentum indicator that relates volume to price change. On
Balance Volume was developed by Joe Granville.

Interpretation:
On Balance Volume is a running total of volume. It shows if volume is flowing into or out of a
security. When the security closes higher than the previous close, all of the day's volume is considered
up-volume. When the security closes lower than the previous close, all of the day's volume is
considered down-volume.

H. PRICE OSCILLATOR:
Overview:
The Price Oscillator displays the difference between two moving averages of a security’s price.
The difference between the moving averages can be expressed in either points or percentages. The
Price Oscillator is almost identical to the MACD, except that the Price Oscillator can use any two user
specified moving averages. (The MACD always uses 12- and 26-day moving averages, and always
expresses the difference in points.)

Interpretation:
Moving average analysis typically generates buy signals when a short-term moving average (or
the security’s price) rises above a longer-term moving average. Conversely, sell signals are generated
when a shorter-term moving average (or the security’s price) falls below a longer-term moving
average. The Price Oscillator illustrates the cyclical and often profitable signals generated by these
one- or two-moving-average systems.

I. VOLUME:
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.

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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 panic-driven selling. A healthy up-trend
should have higher volume on the upward legs of the trend, and lower volume on the downward
(corrective) legs. A healthy downtrend usually has higher volume on the downward legs of the trend
and lower volume on the upward (corrective) legs.

J. VOLUME OSCILLATOR:
Overview:
The Volume Oscillator displays the difference between two moving averages of a security's
volume. The difference between the moving averages can be expressed in either points or percentages.

Interpretation:
We can use the difference between two moving averages of volume to determine if the overall
volume trend is increasing or decreasing. When the Volume Oscillator rises above zero, it signifies
that the shorter-term volume moving average has risen above the longer-term volume moving average,
and thus, that the short-term volume trend is higher (i.e., more volume) than the longer-term volume
trend. There are many ways to interpret changes in volume trends. One common belief is that rising
prices coupled with increased volume, and falling prices coupled with decreased volume, is bullish.
Conversely, if volume increases when prices fall, and volume decreases when prices rise, the market is
showing signs of underlying weakness. The theory behind this is straight forward. Rising prices
coupled with increased volume signifies increased upside participation (more buyers) that should lead
to a continued move. Conversely, falling prices coupled with increased volume (more sellers) signifies
decreased upside participation.

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DOW THOERY:
Dow theory is named after Charles H Dow, who is considered as the father of technical
analysis. Dow theory is very basic and more than 100 years old but still remains the foundation of
Technical Analysis.
Dow believed that the stock market as a whole was a reliable measure of overall business
conditions within the economy and that by analysing the overall market, one could accurately gauge
those conditions and identify the direction of major market trends and the likely direction of individual
stocks.
Dow first used his theory to create the Dow Jones Industrial Index and the Dow Jones Rail
Index (now Transportation Index), which were originally compiled by Dow for The Wall Street
Journal. Dow created these indexes because he felt they were an accurate reflection of the business
conditions within the economy because they covered two major economic segments: industrial and rail
(transportation). While these indexes have changed over the last 100 years, the theory still applies to
current market indexes. Much of what we know today as technical analysis has its roots in Dow's
work. For this reason, all traders using technical analysis should get to know the six basic principles of
Dow theory.
PRINCIPLES OF DOW THEORY:
1. THE STOCK MARKERT DISCOUNTS ALL INFORMATION:
The first basic premise of Dow Theory suggests that all information - past, current and even
future - is discounted into the markets and reflected in the prices of stocks and indexes. That
information includes everything from the emotions of investors to inflation and interest-rate data,
along with pending earning announcements to be made by companies after the close. Based on this
tenet, the only information excluded is that which is unknowable, such as a massive earthquake. But
even then the risks of such an event are priced into the market.
It's important to note that this is not to suggest that market participants, or even the market
itself, are all knowing, with the ability to predict future events. Rather, it means that over any period of
time, all factors - those that have happened, are expected to happen and could happen - are priced into
the market. As things change, such as market risks, the market adjusts along with the prices, reflecting
that new information. While Dow Theory differs in that it is used to predict future trends, the idea that
all market information is priced in is what is comparable.

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2. THE STOCK MARKET HAS THREE TRENDS:


Dow theory identifies three trends within the market: primary, secondary and minor. A primary
trend is the largest trend lasting for more than a year, while a secondary trend is an intermediate trend
that lasts three weeks to three months and is often associated with a movement against the primary
trend. Finally, the minor trend often lasts less than three weeks and is associated with the movements
in the intermediate trend
I. Primary Trend:
In Dow theory, the primary trend is the major trend of the market, which makes it the most
important one to determine. This is because the overriding trend is the one that affects the movements
in stock prices. The primary trend will also impact the secondary and minor trends within the market.
Dow determined that a primary trend will generally last between one and three years but could vary in
some instances.

Regardless of trend length, the primary trend remains in effect until there is a
confirmed reversal. When reviewing trends, one of the most difficult things to determine is how long
the price movement within a primary trend will last before it reverses. The most important aspect is to
identify the direction of this trend and to trade with it, and not against it, until the weight of evidence
suggests that the primary trend has reversed.

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II. SECONDARY TREND:


In Dow theory, a primary trend is the main direction in which the market is moving.
Conversely, a secondary trend moves in the opposite direction of the primary trend, or as a correction
to the primary trend.

For example, an upward primary trend will be composed of secondary downward trends. This
is the movement from a consecutively higher high to a consecutively lower high. In a primary
downward trend the secondary trend will be an upward move, or a rally. This is the movement from a
consecutively lower low to a consecutively higher low.

In general, a secondary, or intermediate, trend typically lasts between three weeks and three
months, while the retracement of the secondary trend generally ranges between one-third to two-thirds
of the primary trend's movement. For example, if the primary upward trend moved from 20,000 to
22,500 (2,500 points), the secondary trend would be expected to send down at least 833 points (one-
third of 2,500). Another important characteristic of a secondary trend is that its moves are often more
volatile than those of the primary move.

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III. MINOR TREND:

The last of the three trend types in Dow theory is the minor trend, which is defined as a market
movement lasting less than three weeks. The minor trend is generally the corrective moves within a
secondary move, or those moves that go against the direction of the secondary trend.

Due to its short-term nature and the longer-term focus of Dow theory, the minor trend is not of
major concern to Dow theory followers. But this doesn't mean it is completely irrelevant; the minor
trend is watched with the large picture in mind, as these short-term price movements are a part of both
the primary and secondary trends
Most proponents of Dow theory focus their attention on the primary and secondary trends, as
minor trends tend to include a considerable amount of noise. If too much focus is placed on minor
trends, it can to lead to irrational trading, as traders get distracted by short-term volatility and lose sight
of the bigger picture. Stated simply, the greater the time period a trend comprises, the more important
the trend.

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3. PRIMARY TREND HAS THREE PHASES:

I. THE ACCUMULATION PHASE:

The first stage of a bull market is referred to as the accumulation phase, which is the start of the
upward trend. This is also considered the point at which informed investors start to enter the market.
The accumulation phase typically comes at the end of a downtrend, when everything is seemingly at
its worst. But this is also the time when the price of the market is at its most attractive level because by
this point most of the bad news is priced into the market, thereby limiting downside risk and offering
attractive valuations.
However, the accumulation phase can be the most difficult one to spot because it comes at the
end of a downward move, which could be nothing more than a secondary move in a primary
downward trend - instead of being the start of a new uptrend.

A new upward trend will be confirmed when the market doesn't move to a consecutively lower
low and high.
II. ARTIPCIPATION PHASE:
When informed investors entered the market during the accumulation phase, they did so with
the assumption that the worst was over and a recovery lay ahead. As this starts to materialize, the new
primary trend moves into what is known as the public participation phase.
During this phase, negative sentiment starts to dissipate as business conditions - marked by
earnings growth and strong economic data - improve. As the good news starts to permeate the market,
more and more investors move back in, sending prices higher.
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This phase tends not only to be the longest lasting, but also the one with the largest price
movement. It's also the phase in which most technical and trend traders start to take long positions, as
the new upward primary trend has confirmed itself - a sign these participants have waited for.

III. DISTRIBUTION PHASE:


The first phase in a bear market is known as the distribution phase, the period in which
informed buyers sell (distribute) their positions. This is the opposite of the accumulation phase during
a bull market in that the informed buyers are now selling into an overbought market instead of buying
in an oversold market.
In this phase, overall sentiment continues to be optimistic, with expectations of higher market
levels. It is also the phase in which there is continued buying by the last of the investors in the market,
especially those who missed the big move but are hoping for a similar one in the near future.
From a technical standpoint, the distribution phase is represented by a topping of the market
where the price movement starts to flatten as selling pressure increases. The mid to latter stages of the
distribution phase will see prices start to fall as more and more investors, anticipating weakness, exit
their positions. A new downward trend will be confirmed when the previous trend fails to make
another consecutive higher high and low.

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4. STOCK MARKET INDEXES MUST CONFIRM EACH OTHER:


Under Dow theory, a major reversal from a bull to a bear market (or vice versa) cannot be
signalled unless both indexes (traditionally the Dow Industrial and Rail Averages) are in agreement.
This means that the signals that occur on the chart of one index must match or correspond with the
signals occurring on the other.
For example, if one index such as the Dow Jones Industrial Average is confirming a new
primary uptrend, but the Dow Jones Transportation Average remains in a primary downward trend,
prudent active traders should not assume that a new trend has begun.
The reason for this is that a primary trend, either up or down, is the overall direction of the
stock market, which in Dow theory is a reflection of business conditions in the economy. When the
stock market is doing well, it is because business conditions are good; when the stock market is doing
poorly, it is due to poor business conditions. If the two Dow indexes are in conflict, there is no clear
trend in business conditions.

5. VOLUME MUST CONFIRM THE TREND:


According to Dow Theory, the main signals for buying and selling are based on the price
movements of the indexes. Volume is also used as a secondary indicator to help confirm what the price
movement is suggesting.
From this tenet it follows that volume should increase when the price moves in the direction of
the trend and decrease when the price moves in the opposite direction of the trend. For example, in an
uptrend, volume should increase when the price rises and fall when the price falls. The reason for this
is that the uptrend shows strength when volume increases because traders are more willing to buy an
asset in the belief that the upward momentum will continue. Low volume during the corrective periods
signals that most traders are not willing to close their positions because they believe the momentum of
the primary trend will continue.
According to Dow theory, once a trend has been confirmed by volume, the majority of money
in the market should be moving with the trend and not against it. Volume and the technical indicators
that are derived from it are undoubtedly some of the most powerful tools at the disposal of proponents
of Dow Theory.

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6. TREND REMAINS INTACT UNTILL AND UNLESS CLEAR REVERSAL

SIGNAL OCCUR:
The reason for identifying a trend is to determine the overall direction of the market so that
trades can be made with the trends and not against them. As was illustrated in the third tenet, trends
move from uptrend to downtrend, which makes it important to identify transitions between these two
trend directions.
In Dow Theory, the sixth and final tenet states that a trend remains in effect until the weight of
evidence suggests that it has been reversed.
Traders wait for a clear picture of a trend reversal because the goal is not to confuse a true
reversal in the primary trend with a secondary trend or brief correction. Remember that a secondary
trend is a move in the opposite direction of the primary trend that will not continue. For example,
imagine that the primary trend is up, but the indexes are currently selling off. If an investor were to
take a short position, concluding that the sell-off is the start of a new primary downward trend, they
could get burned when the primary trend continues.

LIMITATIONS OF DOW THEORY:


Since its original adaptation and subsequent updates, its relevance as a stand-alone analytical
technique has weakened. The reason for this has been the advent of more advanced techniques and
tools, which in part build off of Dow theory, but greatly expand upon it.
One of the bigger problems with the theory is that followers can miss out on large gains due to
the conservative nature of a trend-reversal signal. As we mentioned previously, a signal is confirmed
when there is an end to successive highs (uptrend) or lows (downtrend). However, what often happens
is that by the time the market has shown a clear sign of reversal, the market has already generated a
large gain.
Another problem with Dow theory is that over time, the economy - and the indexes originally
used by Dow - have changed. Consequently, the link between them has weakened. For example, the
industrial and transportation sectors of the economy are no longer the dominant parts. Technology, for
example, now takes up a considerable portion of economic production and growth.
 Even though there are weaknesses in Dow Theory, it will always be important to technical
analysis. The ideas of trending markets and peak-and-trough analysis are found constantly
within technical writings and ideas. Also of importance in Dow Theory is the idea of emotions
in the marketplace, which remains a characteristic of market trends.
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DISADVANTAGES/ DRAWBACKS OF TECHNICAL ANALYSIS:

I. BIASNESS:
Technical analysis is not a hard core science. It is subjective in nature and your personal biases
can be reflected in the analysis. It is important to be aware of these biases when analyzing a chart. If
the analyst is a perpetual bull, then a bullish bias will overshadow the analysis. On the other hand, if
the analyst is a disgruntled eternal bear, them the analysis will probably have a bearish tilt.
II. DIFFERENT INTERPRETATIONS:
Technical analysis is a combination of science and art and is always open to interpretation.
Even though there are standards, many times two technicians will look at the same chart and paint two
different scenarios or see different patterns. Both will be able to come up with logical support and
resistance levels as well as key breaks to justify their positions.
III. TOO LATE:
You can criticize the technical analysis for being too late. By the time the trend is identified, a
substantial move has already taken place. After such a large move, the reward to risk ratio is not great.
Lateness is a particular criticism of Dow Theory. Getting very near to top and bottom for entry and
exit respectively is been possible due to Elliott and Neo wave studies, but most of the studies are late.
IV. ALWAYS NEW LEVEL DUE TO DIFFERENT TIMEFRAMES:
Technical analysis always waits for another new level. Even after a new trend has been
identified, there is always another “important” level close at hand. Technicians have been accused of
sitting on the fence and never taking an unqualified stance. Even if they are bullish, there is always
some indicator or some level that will qualify their option.
V. TRADER’S REMORSE:
An array of pattern and indicators arises while studying technical analysis. Not all the signals
work. For instance: a sell signal is given when the neckline of a head and shoulders pattern is broken.
Even though this is a rule, it is not steadfast and can be subject to other factors such as volume and
momentum. In that same vein, what works for one particular stock may not work for another. A 50-day
moving average may work great to identify support and resistance for Infosys, but a 70-day moving
average may work better for reliance. Even though many principles of technical analysis are universal,
each security will have its own idiosyncrasies.

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EXAMPLES OF TECHNICAL ANALYSIS:

1. WIPRO:
Wipro Limited (formerly Western India Products Limited is an Indian multinational
information technology (IT), consulting and outsourcing service company headquartered in Bangalore,
Karnataka, India. As of September 2013, the company has 147,000 employees serving over 900 clients
with a presence in 61 countries. Wipro is the third largest IT services company in India.
STOCK PRICE MOVEMENT OF WIPRO:

From the above chart the price is located above the EMA. The chart WIPRO represents the
variation in different price such as open, high, low and close in respect of different weeks which had
been taken into consideration 03/02/2011 to 03/03/2014. The candlestick chart of WIPRO can the
stock prices of WIPRO are in short term and medium term is bullish. Already triple top breakout on
26/08/2013 at 483 level next replacement targets 592,660 and 760 and stop loss 540 level expected.
The MACD and RSI also indicate the even bought trend. On the basis of the trend investor makes a
decision about buy or sell.
Recommendation:
Short and medium term bullish

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2. SBIN (State Bank of India):


State Bank of India provides banking products and services in India and at international. It
offers personal banking products and services, which include current accounts, savings accounts, term
deposits, and capital gains account schemes; housing, car, property, educational, personal, festival,
career, scholar, and gold loans, as well as loans for pensioners and loans against shares and debentures;
and mobile and Internet banking, demat, ATM, foreign inward remittance, safe deposit locker, public
provident fund, multi-city cheques, money transfer, and mobile wallet services, as well as debit,
business debit, prepaid, and virtual cards. The company operates through 20,325 branches, including
5,509 branches of its 5 associate banks; and 32,752 ATMs. State Bank of India was founded in 1806
and is based in Mumbai, India.
STOCK PRICE VARIATION OF SBIN:

From above chart it could be concluded that the price is located below making average. The
chart SBIN represents the variation in different price. Such as open, high, low and close in respect of
different weeks which had been taken into consideration 03/02/2011 to03/03/2014. The candlestick
chart of SBIN can the stock price of SBIN are in short term bullish and medium and long term bearish
trend expected. Double bottom line 1447 breakout next supports at 1250 if buy above 1930 only
uptrend generated. MACD and RSI technically indicate weak trend.
Recommendation:
• Buy SBIN above at 1930
• Sell below 1447 down target 1250
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3. GAIL (GAIL India Ltd.):


GAIL (India) Limited operates as a natural gas company in India and abroad. The company
operates through Transmission Services, Natural Gas Trading, Petrochemicals, Liquefied Petroleum
Gas (LPG) and Other Liquid Hydrocarbons, and Other segments. It is involved in the transmission,
distribution, and marketing of natural gas to power and fertilizer sectors, as well as supplies liquefied
natural gas to downstream consumers. The company also markets LPG, propane, pentane, naphtha,
MFO, propylene, and hydrogenated C4 mix; and manufactures and markets petrochemicals, such as
high density polyethylene and linear low density polyethylene under the brand names of G-Lex, G-
Lene, and GAIL.
Stock Price Movement of Gail:

The price of GAIL is located above moving average. It is indicated to buy the stock. The charts
and AIL represents the variation in different price. Such as open, high, low and close in respect of
different had been taken into consideration 03/02/2011 to 03/03/2014. Trend line is between 362 to
394. It shows the positive note that the price may increase. In moving average analysis, price line is
above the mainly average to it indicates the buy signal. GAIL short term target 396 and medium and
long term buy above 401 next targets 443 and 465 long term trend is bullish. According to RSI &
MACD analysis is technically strong signal to buy.
Recommendation:
• Long term buy above 400 targets 443 and 465

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Technical analysis
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4. ONGC (Oil & Natural Gas Corporation Ltd.):


Oil and Natural Gas Corporation Limited is engaged in the exploration, development, and
production of oil and gas in India and internationally. The company’s products include crude oil,
natural gas, liquefied petroleum gas, naphtha, ethane/propane, kerosene oil, low sulphur heavy stock,
high speed diesel, motor spirit, aviation turbine fuel, mineral turpentine oil, and others. It is also
involved in power generation, liquefied natural gas supply, and pipeline transportation activities; and
the provision of petrochemicals. Oil and Natural Gas Corporation Limited was incorporated in 1993
and is based in Dehradun, India.
Stock Price Behaviour of ONGC:

Above chart kindly indicates the price movements of ONGC located above the support level.
The chart ONGC represents the variation in prices. Such as open, high, low and close in respect of
different weeks which the period 03/02/2011 to 03/03/2014 was taken for the purposes. The
candlestick chart of ONGC can the spot the share price of ONGC are in short term medium term is
bullish and long team bearish trend. The ONGC range bound between 262 to 308 if break 308 next
upper targets levels at 319.8 and 345 and it break 262 level downtrend targets 244. Short term
according to RSI &MACD analysis ONGC is technically strong. On the basis of this trend investor
makes a decision buy and sell.
Recommendation:
• Short and medium term buy at 308 targets 319 and 345 &
• Sell below 262 target 244
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5. ITC (ITC Ltd.):


ITC Limited engages in fast moving consumer goods, paperboards and packaging, hotels, and
agro Businesses in India and internationally. The company offers cigarettes under the Insignia, India
Kings, Lucky Strike, Classic, Gold Flake, Navy Cut, Players, Scissors, Capstan, Berkeley, Bristol,
Flake, Silk Cut, and Duke & Royal brands; Armenteros hand rolled cigars; ready to eat foods, staples,
confectionery products, and snack foods under the Aashirvaad, Sunfeast, Bingo!, Kitchens of India.
ITC Limited provides information technology services and solutions to various industries. The
company was incorporated in 1910 and is based in Kolkata, India.
Stock Price Movement of ITC:

ITC chart signifies the sideways price movement for the last four months the chart ITC
represents the variation in different price. Such as open, high, low and close in respect of different
weeks which the periods 03/02/2011 to 03/03/2014 was taken for the purposes. The candlestick chart
of ITC can the current share price of ITC are in Head and Shoulder pattern after that sideway trend
created the crucial points 305 and 340. It breaks 305 next supports 285 and if breaks 282 heavy falls
expected upper stop loss 335 and buy above 340 levels upper targets 365 and 380. RSI and MACD
short term bullish signal.
Recommendation:
• Short and medium term buy at 340 targets 365 and 380 &
• Sell below 282

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CONCLUSION:
Technical analysis is a technique which gives an idea about future share prices of selected
companies in which we invest. On the basis of the knowledge of technical analysis one can predict the
perfect investment decision of the stock market. By using the technical indicators the future market of
securities would be known in which to invest. The more accurate prediction of stock prices of selected
companies the investor to carry out fundamental analysis of stock prices, they can predict of future
trend of stock prices. On the basis of prediction of five companies (i.e. WIPRO, SBIN, GAIL, ONGC,
ITC) different pattern of stock prices of these companies give an idea of future trend of these
companies could be analysed with the right technical analysis tools, technical analysis of utmost
importance to predict trend of short and medium term price movement and help the investors to select
the right plan and decisions to invest in the remunerative stocks. The technician also required a
fundamental knowledge, which would clear an idea about the investment decision. Both Technical and
Fundamental analysis helps in investment decision in the stock market and predict the future trend of
the selected companies in which we have invested. Both the analysis gives guidance to the investors.

“There is only one side to the stock market and it is not the bull side or the bear side but the
right side. Technical analysis can be used, when to buy and to when to sell the stock”.

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