2. Meaning:
• Study of market generated data like price and volume
to determine the future direction of price movement.
• A study of past or historical price and volume
movement so as to predict the future stocks price
behavior.
• Forecasting techniques that utilize historical share price
data.
Vipin k, Asst Prof. VJIM
2
3. • Technical analysts believe that past patterns of market action
will recur in the future and that past patterns can be used for
predictive purposes.
• Some of the tools used by chartists to measure supply and
demand and to forecast security prices are the Dow theory
chart, odd-lot theory, confidence index, breadth-of-market
indicators, relative-strength analysis, and trading-volume
data.
Vipin k, Asst Prof. VJIM
3
4. Assumptions/basic principles/premises of technical analysis
Market prices are determined by the interactions of supply and
demand forces.
Supply and demand are influenced by variety of factors, both
rational and irrational. Includes fundamentals as well as
psychological factors.
Shift in demand & supply bring about changes in trends.
Shift in demand & supply detected with the help of charts of
market action.
Analysis of past market data can be used to predict the future price
behavior.
Vipin k, Asst Prof. VJIM
4
9. • Charles .H. Dow
• Editor of wall street journal, in USA
• Popularly known as Theory of Technical
analysis
Vipin k, Asst Prof. VJIM
9
10. According to Charles .H. Dow
• “ The market is always considered as having
three movements, all going at the same time. The
first is the narrow movement from day to day.
The second is the short swing, running from
two weeks to a month or more; the third is the
main movement covering at least four years in
its duration”
Vipin k, Asst Prof. VJIM
10
11. • The Dow theory is used to indicate reversals and trends in
the market as a whole or in individual securities.
• According to the theory, there are three movements going
on in the markets at all times:
1. daily fluctuations (the narrow movement from
day-to-day)
2. secondary movements (short-run movements over
two weeks to a month or more)
3. primary trends, major movements covering at
least four years in duration
Vipin k, Asst Prof. VJIM
11
12. • Dow formulated a hypothesis is that the stock
market does not move on a random basis but
is influenced by three distinctive cyclical
trends that guides its direction.
1) Primary / main movements
2) Secondary reaction / correction movement
3) Minor / narrow movements
Vipin k, Asst Prof. VJIM
12
13. According to Dow theory
• Price movements in the market can be identified by
means of line chart.
• In the line chart, closing price of shares or the closing
value of the market index may be plotted against the
corresponding trading day.
• The charts helps in identifying the primary, secondary
and minor movements.
Vipin k, Asst Prof. VJIM
13
14. * Primary or main movements /trend
• Long range cycle that carries the entire market up or
down long term trend in the market.
* Secondary reaction or correction movement/trend
• These are the opposite direction to the primary
movements
• Only for a short period
• Eg:- when the market is moving upward continuously, this
upward movement will be interrupted by downward
movement of short duration.
Vipin k, Asst Prof. VJIM
14
16. Minor or Narrow movements/trend
Day today fluctuations in the market
Not significant & have no analytical value
Very short duration
Vipin k, Asst Prof. VJIM
16
18. • Trend is the direction of movement.
• Share price can either increase, decrease or
remain in flat.
• The three directions :
Vipin k, Asst Prof. VJIM
18
19. • Share price do not rise or fall in a straight line.
• Every rise or fall in price experience a counter moves
• Share price move in a zigzag manner.
Vipin k, Asst Prof. VJIM
19
20. Trend lines
• Straight line drawn connecting either the top or
bottom of the price movement
• To draw a trend line, the technical analyst
should have at lest two tops or bottoms.
Vipin k, Asst Prof. VJIM
20
24. Trend Reversal
• Changes in the direction of trend is referred to as
trend reversal.
• A share that exhibits a rising trend may start to move
narrowly or fall after some times, this change in the
direction of movement represent trend reversal.
• Technical analyst tries to identify the trend reversal at
an early stage so as to trade profitably.
Vipin k, Asst Prof. VJIM
24
25. • When the trend begins to rise the technical analyst
would recommend purchase of the shares.
• When the trend begins to fall, sale is indicated.
• During a flat trend the investor should stay away
from the market.
Vipin k, Asst Prof. VJIM
25
27. • Ralph Elliot
• Theory was formulated in 1934
• After analyzing 75 years of stock market price
movements and charts.
• According to this theory – market movement was
quite orderly and followed a patter of waves.
Vipin k, Asst Prof. VJIM
27
28. According to this theory
• The market moves in waves
(A wave is a movement of the stock price from one change in
the direction to the next change in the same direction.
Depending on the demand & supply pressure waves are
generated)
Vipin k, Asst Prof. VJIM
28
30. According to this theory
• A movement in a particular direction can be
represented by five distinctive waves.
• Of these five waves, three waves are in the direction
of the movement & are called impulse waves.
• Two waves are against the direction of the movement
& are termed as corrective waves or reaction waves
Vipin k, Asst Prof. VJIM
30
34. • Waves 1,3 & 5 are the impulsive waves
• 2 & 4 are the corrective waves
• The wave 1 is upwards and wave 2 correct the wave
1.
• Waves 3 & 5 are impulsive and 4 corrects wave 3
Vipin k, Asst Prof. VJIM
34
35. • Correction involves correcting the earlier rise
• Wave 2 would correct the rise of wave 1
• Wave 4 would correct the rise of wave 3 & after the
completion of wave 5, there would come a correction
which would be labeled ABC
• This correction would be in three waves in which the
waves ‘A & C’ will be against the trend and wave ‘B’
will be along the trend.
Vipin k, Asst Prof. VJIM
35
36. • The ABC correction following the fifth wave would
correct the entire rise from the starting of wave 1 to the
end of the fifth wave.
• One complete cycle consist of waves made up of two
distinctive phases, bullish & bearish. One full cycle
of waves is completed after the termination of 8 waves
movement, there will be a fresh cycle started.
• The theory is used for predicting the future price
changes & in deciding the timing of investment.
Vipin k, Asst Prof. VJIM
36
37. Support and
Level
• Support and resistance define natural
boundaries for rising and falling prices.
Vipin k, Asst Prof. VJIM
37
39. Support Level
• Level that the technical analyst believes a
stock price will not fall below. Some times
called “Floor”.
Vipin k, Asst Prof. VJIM
39
40. Resistance Level
• Opposite of support level.
• Technical analyst believe that stock price will
not exceed.
Vipin k, Asst Prof. VJIM
40
41. Breakout
• The security price moves out of the previous
trading range (breaching the resistance or support
level)
Vipin k, Asst Prof. VJIM
41
42. • Term used to study the advance and decline that have occurred
in the stock market.
• Advance means – Number of shares whose prices have
increased from the previous day’s trading.
• Decline means – Number of shares whose prices have fallen
from the previous day’s trading.
• The net difference between the number of stock advanced
& declined during the same period is the breadth of the
market.
Vipin k, Asst Prof. VJIM
• A cumulative index of net differences measure the market
42
45. • Line Chart
• Bar Charts
• Candlestick Charts
Vipin k, Asst Prof. VJIM
45
46. Line Chart
The most basic of the four charts – because it represents only the closing
prices over a set period of time.
The line is formed by connecting the closing prices over the time frame.
Do not provide visual information of the trading range for the individual
points such as the high, low and opening prices.
The closing price is often considered to be the most important price in
stock data compared to the high and low for the day and this is why it is
the only value used in line charts.
Vipin k, Asst Prof. VJIM
46
48. Bar Charts
•
The chart is made up of a series of vertical lines that represent
each data point. This vertical line represents the high and low for
the trading period, along with the closing price.
• The close and open are represented on the vertical line by a
horizontal dash.
• The opening price on a bar chart is illustrated by the dash that is
located on the left side of the vertical bar.
• Conversely, the close is represented by the dash on the right.
Vipin k, Asst Prof. VJIM
48
49. Bar Charts
• Generally, if the left dash (open) is lower than the right
dash (close) then the bar will be shaded black,
representing an up period for the stock, which means it
has gained value.
• A bar that is colored red signals that the stock has gone
down in value over that period. When this is the case, the
dash on the right (close) is lower than the dash on the left
(open).
Vipin k, Asst Prof. VJIM
49
51. Candlestick Charts
•
Similar to a bar chart, but it differs in the way that it is visually constructed.
•
The difference comes in the formation of a wide bar on the vertical line, which illustrates the
difference between the open and close. And, like bar charts, candlesticks also rely heavily on
the use of colors to explain what has happened during the trading period.
•
There are two color constructs for days up and one for days that the price falls.
•
When the price of the stock is up and closes above the opening trade, the candlestick will
usually be white or clear.
•
If the stock has traded down for the period, then the candlestick will usually be red or black,
depending on the site.
•
If the stock's price has closed above the previous day's close but below the day's open, the
candlestick will be black or filled with the color that is used to indicate an up day
Vipin k, Asst Prof. VJIM
51
53. • Mathematical indicators calculated with the help of
the closing price data.
• Helps to identify overbought and over sold conditions
of the scrip.
• Helps to identify possibility of trend reversal.
Vipin k, Asst Prof. VJIM
53
54. • RSI (Relative Strength Index)
• ROC (Rate of Change Indicator)
• MACD (Moving Average Convergence/Divergence)
Vipin k, Asst Prof. VJIM
54
55. (Relative Strength Index)
RSI = 100 – 100
(1+RS)
RS = Average gain per day
Average loss per day
Vipin k, Asst Prof. VJIM
55
56. • Most commonly used time period for the calculation of RSI
is 14 days.
• RSI value ranging from 0 – 100
• RSI value above
70 are considered to denote overbought
condition.
• RSI value below
30
considered to denote oversold
condition.
Vipin k, Asst Prof. VJIM
56
58. ROC (Rate of Change Indicator)
• ROC measures the rate of change of the
current price as compared to the price a certain
number of days or weeks back.
• ROC =
Current price
price ‘n’ period ago
Vipin k, Asst Prof. VJIM
- 1
58
59. ROC (Rate of Change Indicator)
• Value may be +ve,-ve or zero
• When the ROC line is above the zero line, the price
is rising & when it is below zero line ,the price is
falling.
Vipin k, Asst Prof. VJIM
59
60. MACD (Moving Average Convergence Divergence)
• Short term & long term exponential moving average
are calculated with the help of closing price data.
• A 12 day & 48 day exponential moving average are
popular combination
• Difference between short term & long term EMA
represent MACD
Vipin k, Asst Prof. VJIM
60
62. MACD (Moving Average Convergence Divergence)
• MACD line (blue line): difference between the 12 and 26 days EMAs
• signal (red line): 9 day EMA of the blue line
• histogram (bar graph): difference between the blue and red lines
Mathematically:
• MACD = [stockPrices,12]EMA - [stockPrices,26]EMA
• signal = [MACD,9]EMA
• histogram = MACD – signal
Vipin k, Asst Prof. VJIM
62
63. • Shares are generally sold in a lot of hundreds
• Shares are sold in smaller lots fewer than 100 are called odd lot.
•
Buyers & sellers of odd lots are called odd lotters.
• Odd lot purchases to odd lot sales ( purchase %) is the odd lot index.
( Odd lot purchases divided by odd lot sales)
• Increases the odd lot purchases results in an increase in the index.(selling
leads to fall the index)
Vipin k, Asst Prof. VJIM
63
64. • Basic assumption of technical analyst is that price trends
occur in an orderly manner & not random.
• Random walk theory gained popularity in 1973 when
Burton Malkiel wrote "A Random Walk Down Wall
Street", a book that is now regarded as an investment
classic.
• Theory that states that the past movement or direction
of the price of a stock or overall market cannot be used
to predict its future movement.
Vipin k, Asst Prof. VJIM
64
65. • Random walk theory states that market price evolve at random and do
not follow any regular pattern.
• According to this theory future stock price are
completely independent of past stock prices.
• The Random Walk Hypothesis is a financial theory stating that stock
market prices evolve according to a random walk and thus the prices of
the stock market cannot be predicted by analyzing the past stock prices.
Vipin k, Asst Prof. VJIM
65
66. Market is supreme and no investor or group can influence it.
Stock price discount all information quickly.
Markets are efficient and that the flow of information is free
and unbiased.
All investors have free access to the same information and
nobody has superior knowledge or expertise.
Market quickly adjusts itself to any deviations from
equilibrium level due to the operations of free forces of
demand and supply.
Vipin k, Asst or insider information.
Nobody has better knowledge Prof. VJIM
66
67. • Hypothesis states that the capital
market is efficient in processing
information.
• Efficient capital market is one in which security prices equal their
intrinsic value at all time, and where most securities are correctly priced.
• According to Elton and Gruber,” when some one refers to efficient capital
markets, they mean that securities prices fully reflect all available
information”
Vipin k, Asst Prof. VJIM
67
68. Forms of market efficiency
• There are three forms of the efficient market hypothesis
• The "Weak" form asserts that all past market prices and data are fully
reflected in securities prices. In other words, technical analysis is of no
use.
• The "Semi strong" form asserts that all publicly available information
is fully reflected in securities prices. In other words, fundamental
analysis is of no use.
• The "Strong" form asserts that all information is fully reflected in
securities prices. In other words, even insider information is of no use.
Vipin k, Asst Prof. VJIM
68
69. •
In this diagram, the circles
represent
the
amount
of All historical prices and returns
information that each form of the
Strong Form
EMH includes.
•
Note that the weak form covers
Semi-Strong
the least amount of information,
and the strong form covers all
Weak Form
information.
•
Also note that each successive
form includes the previous ones.
All information, public and
private
Vipin k, Asst Prof. VJIM
All public information
69
70. • Information is free and quick to flow
• All investors have the same access to information.
• Every investor has access to lending and borrowing at the same rate.
• Market absorbs the information quickly and the market responds to
new technology, new trends, change the tastes, etc efficiently and
quickly.
• Investors are rational and behave in a cost effective competitive
manner for optimization of returns
Vipin k, Asst Prof. VJIM
70