1. “Technical analysis”
(Analysis of State Bank of India)
Rishikesh R Kshirsagar
Masters in Financial Services Management (M.F.S.M)
Academic Year – 2011-12
Under the Guidance of
Prof. Pankaj Bhattacharjee
University of Mumbai’s
Alkesh Dinesh Mody Institute For
Financial and Management Studies
1

2. Declaration
I, Mr. Rishikesh Ravindra Kshirsagar TYMFSM Student of Alkesh
Dinesh Mody Institute for Financial and Management Studies, hereby
declare that I have completed the project titled Technical analysis of
State Bank of India during the academic year 2011-2012.
The report work is original and the information/data included in the
report is true to the best of my Knowledge. Due credit is extended on
the work of Literature/Secondary Survey by endorsing it in the
Bibliography as per prescribed format.
Signature of the Student with
Date
Rishikesh Ravindra Kshirsagar
2

3. University of Mumbai’s
Alkesh Dinesh Mody Institute For
Financial and Management Studies
Certificate
I, Professor Pankaj Bhattacharjee hereby certify that Mr. Rishikesh
Ravindra Kshirsagar, TYMFSM Student of Alkesh Dinesh Mody
Institute for Financial and Management Studies has completed a
project titled Technical analysis of State Bank of India in the academic
year 2011-2012. The work of the student is original and the
information included in the project is true to the best of my
Knowledge.
Signature of Guide with Date
Prof. Pankaj Bhattacharjee
3

4. TABLE OF CONTENTS
S.NO. PARTICULARS PAGE
NO.
1. Introduction 5
2. Technical analysis 8
3 Dow Theory 10
4 Drawbacks / limitations of technical analysis
15
5 Tools & Instruments in technical analysis 18
6 Chart Types 20
7 Trends In Technical Analysis 37
8 Why Volume Is Important 45
9 Chart Patterns 48
10 Technical Indicators 73
11 Technical analysis of “State Bank of India” 87
12 Bibliography 95
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5. INTRODUCTION:-
WHAT’S THIS EQUITY ANALYSIS?
Professional investor will make more money & less loss than, who
let their heart rule. Their head eliminate all emotions for decision making.
Be ruthless & calculating, you are out to make money. Decision should
be based on actual movement of share price measured both in money &
percentage term & nothing else. Greed must be avoided
Patience may be a virtue, but impatience can frequently be
profitable.
In Equity Analysis anticipated growth, calculations are based on
considered FACTS & not on HOPE. Equity analysis is basically a
combination of two independent analyses, namely fundamental analysis
& Technical analysis. The subject of Equity analysis, i.e. the attempt to
determine future share price movement & its reliability by references to
historical data is a vast one, covering many aspect from the calculating
various FINANCIAL RATIOS, plotting of CHARTS to extremely
sophisticated indicators.
A general investor can apply the principles by using the simplest of
tools: pocket calculator, pencil, ruler, chart paper & your cautious mind,
watchful attention. It should be pointed out that, this equity analysis does
not discuss how to buy & sell shares, but does discuss a method which
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6. enables the investor to arrive at buying & selling decision. The financial
analysts always need yardsticks to evaluate the efficiency &
performances of any business unit at the time of investment. Fundamental
analysis is useful in long term investment decision. In Fundamental
analysis a company s goodwill,
It’s performances, liquidity, leverage, turnover, profitability & financial
health was checked & analysis with the help of ratio analysis for the
purpose of long term successful investment.
Technical analysis refers to the study of market generated data like
prices & volume to determine the future direction of prices movements.
Technical analysis mainly seeks to predict the short term price
travels. The focus of technical analysis is mainly on the internal market
data, i.e. prices & volume data. It appeals mainly to short term traders.
It is the oldest approach to equity investment dating back to the
late 19th century.
Assumption’s for the Equity Analysis.
1. Works only in normal share-market conditions with great reliability, it
also works in abnormal share-market conditions, but with low reliability.
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7. 2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY,
so the investment object has vital importance associated to return along
with risk.
3. Cash management gets the magnitude role, because the scenario of
equity analysis is revolving around the term money
4. Portfolio management, risk management was up to the investor s
knowledge.
5. Capital market trend is always a friend, whether it is short run or long
run.
6. You are buying stock & not companies, so don t are curious or panic to
do
Post-mortem of companies’ performances
7. History repeats: investors & speculators react the same way to the
same types of events homogeneously.
8. Capital market has a typical market psychology along with other issues
like; perceptions, the crowd Vs the individual, tradition s & trust.
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8. 9. An individual perceptions about the investment return & associated
risk may differ from individual to individual.
10. Although the equity analysis is art as well as sciences so, it also has
some
Exceptions
EQUITY ANALYSIS
FUNDAMENTAL TECHNICAL
ANALYSIS ANALYSIS
Technical analysis:-
“Technical analysis refers to the study of market generated data
like prices & volume to determine the future direction of prices
movements.”
Technical analysis mainly seeks to predict the short term price
travels. It is important criteria for selecting the company to invest. It also
provides the base for decision-making in investment. The one of the most
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9. 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 inferring a trend and judging the future movement of the stock on
the basis of the trend. Technical Analysis assumes that the market is
efficient and the price has already taken into consideration the other
factors related to the company and the industry. It is because of this
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10. assumption that many think technical analysis is a tool, which is effective
for short-term investing.
DOW THEORY:-
• Charles Dow who was editor of Wall Street Journal in
1900 is known for the most important theory developed by
him with technical indicators. In fact, the theory gained so
much significance that the theory was named after him.
• The Dow Theory has been further developed by other
technical analysts and it forms the basis of the technician’s
theory.
• The theory predicts trends in the market for individual
and total existing securities. It also shows reversals in
stock prices.
• According to ‘Dow theory’, the market always has three
movements and the movements are simultaneous in the
nature. These movements may be described as:-
• The narrow movement which occurs from day to day.
10

11. • The short swing which usually moves for short time like
two weeks and extends up to a month; this movement can
be called a short term movement, and
The third movement is also the main movement and it
covers for years in its duration.
• According to the type of movements, they have been given
special names.
• The narrow movement is called ‘fluctuations’ the short
swing is better known as ‘secondary movements’ and the
main movement is also called the ‘primary trends’.
• Narrow movements are called ‘fluctuations’. Secondary
movements are those which last only for a short while and
they are also known as “corrections”. Primary trends are,
therefore, the main movement in the stock market. It is
also called ‘Bears” and ‘Bulls” market.
• According to the Dow Theory, the price movements in a
market can be identified by means of a line-chart.
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12. • In this chart the technical analyst should plot the price of
the share. With it, he should also mark the market average
every day.
• This would help in identifying the primary and secondary
movements.
• Dow theorists believe in ‘momentum’, which, according to
them, keeps the price moving in the same direction.
• They believe in primary trends, which according to them
are momentum or bear and bull markets. The momentum
will carry the prices further but momentum of primary
trend will be halted by the terminology used by technical
analysts called ‘support areas’ and ‘resistance areas’.
Criticism of Dow Theory
• The Dow Theory is subject to various limitations in actual
practice.
• Dow has developed this theory to depict the general trend
of the market but not with the intention of projecting the
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13. future trend or to diagnose the buy and sell signals in the
market.
• These applications of the Dow Theory have come in the
light of analytical studies of financial analysts.
• This theory is criticized on the ground that it is too
subjective and based on historical interpretation; it is not
infallible as it depends on the interpretative ability of the
analyst.
• The results of this theory do not also give meaningful and
conclusive evidence of any action to be taken in terms of
buy and sell operations.
Candlestick Charting
• The candle is comprised of two parts, the body and the
shadows. The body encompasses the open and closing
price for the period. The candle body is black if the
security closed below the open, and white if the close was
higher than the open for the period. The candlestick
shadow encompasses the intra period high and low.
13

14. 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
14

15. 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
behaviours.
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16. Drawbacks / limitations of technical analysis:
1. Technical analysis does not able to explain the rezones behind the
employment or selection of specific tool of Technical analysis.
2. The technical analysis failed to signal an uptrend or downtrend in time.
3. The technical analysis must be a self defeating proposition. As more &
more people use, employ it the value of such analysis trends to reduce.
Why we use TECHNICAL ANALYSIS?
1) Technical analysis provides information on the best entry and
Exit points for a trade.
2) On a chart, the trader can see where momentum is rising, a
Trend is forming, a price is dipping or other events are developing that
show the best entry point and time for the most profitable trade. With the
constant movement of various currencies against each other in the Forex
market, most
Traders will focus on using technical indicators to find and place their
Trades
IS TECHNICAL ANALYSIS DIFFICULT?
1) Technical analysis is not difficult, but it requires studying
Different types of charts such as the hourly or daily charts, knowing
which technical indicators to use and how to use them.
2) Computers and the Internet have made this process much easier.
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17. Most brokers provide basic charts and technical indicators for free or at a
very low cost.
3) One way to avoid getting frustrated by all the lines, colours, and
Graphics is to focus on using only a few indicators that will
Provide you with the information needed. Try not to clutter your
Chart with too much information.
Fundamental vs. Technical Analysis
Technical analysis and fundamental analysis are the two main
schools of thought in the financial markets. As we've mentioned,
technical analysis looks at the price movement of a security and uses this
data to predict its future price movements. Fundamental analysis, on the
other hand, looks at economic factors, known as fundamentals.
Fundamental analysis takes a relatively long-term approach
to analyzing the market compared to technical analysis. While
technical analysis can be used on a timeframe of weeks, days or
even minutes, fundamental analysis often looks at data over a
number of years.
The future can be found in the past
17

18. If prices are based on investor expectations, then knowing what a
security should sell for (i.e., fundamental analysis) becomes less
important than knowing what other investors expect it to sell for. That's
not to say that knowing what a security should sell for isn't important--it
is. But there is usually a fairly strong consensus of a stock's future
earnings that the average investor cannot disprove.
Technical analysis is the process of analyzing a security's historical
prices in an effort to determine probable future prices. This is done by
comparing current price action (i.e., current expectations) with
comparable historical price action to predict a reasonable outcome. The
devout technician might define this process as the fact that history repeats
itself while others would suffice to say that we should learn from the
past.
Usually the following tools & instruments are used to
do the technical analysis:
Price Fields
Technical analysis is based almost entirely on the analysis of price and
volume. The fields which define a security's price and volume are
explained below.
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19. Open - This is the price of the first trade for the period (e.g., the first
trade of the day). When analyzing daily data, the Open is especially
important as it is the consensus price after all interested parties were able
to "sleep on it."
High - This is the highest price that the security traded during the
period. It is the point at which there were more sellers than buyers (i.e.,
there are always sellers willing to sell at higher prices, but the High
represents the highest price buyers were willing to pay).
Low - This is the lowest price that the security traded during the period.
It is the point at which there were more buyers than sellers (i.e., there are
always buyers willing to buy at lower prices, but the Low represents the
lowest price sellers were willing to accept).
Close - This is the last price that the security traded during the period.
Due to its availability, the Close is the most often used price for analysis.
The relationship between the Open (the first price) and the Close (the last
price) are considered significant by most technicians. This relationship is
emphasized in candlestick charts.
Volume - This is the number of shares (or contracts) that were traded
during the period. The relationship between prices and volume (e.g.,
increasing prices accompanied with increasing volume) is important.
19

20. 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.
Bid - This is the price a market maker is willing to pay for a security
(i.e., the price you will receive if you sell).
Ask - This is the price a market maker is willing to accept (i.e., the price
you will pay to buy the security).
Price Styles (Charts Types)
Price in a chart can be displayed in four styles:
1. Bar Chart.
2. Line Chart.
3. Candlestick Chart.
4. Point and Figure Charts
1) Bar Charts :
The highs and lows of a foreign currency are plotted in a diagram and the
points are joined with vertical lines (bars). A small horizontal tick to the
left denotes the opening level while a small horizontal tick to the right
represents the closing price of each interval.
20

21. 2) Line Chart.
It gives the detailed information about every aspect.
The exchange rates for each time period are plotted in a diagram and the
points are joined. Prices on the y-axis, time on the x-axis.
The line chart chooses for example the closing price of consecutive time
periods, but can also work with daily, official fixings.
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22. The relatively easy handling of line charts is a great advantage. Line
charts do not show price movements within a time period. This can be a
problem because important information for exchange rate analysis can be
lost. This Problem was remedied with the development of bar charts that
represent a more sophisticated form of line chart.
3) Candlestick Chart.
A candlestick is black if the closing price is lower than the opening price.
A candlestick is white if the closing price is higher than the opening
price.
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23. 23

24. In the 1600s, the Japanese developed a method of technical analysis to
analyze the price of rice contracts. This technique is called candlestick
charting. Steven Nison is credited with popularizing candlestick charting
and has become recognized as the leading expert on their interpretation.
Candlestick charts display the open, high, low, and closing prices in a
format similar to a modern-day bar chart, but in a manner that extenuates
the relationship between the opening and closing prices. Candlestick
Charts are simply a new way of looking at prices, they don't involve any
calculations. Because candlesticks display the relationship between the
open, high, low, and closing prices, they cannot be displayed on
securities that only have closing prices, nor were they intended to be
displayed on securities that lack opening prices.
The interpretation of candlestick charts is based primarily on patterns.
The most popular patterns are explained below.
Bullish Patterns
1) Long white (empty) line. This is a bullish line. It occurs when
prices open near the low and close significantly higher near the
period's high.
24

25. 2) Hammer. This is a bullish line if it occurs after a significant
downtrend. If the line occurs after a significant up-trend, it is
called a Hanging Man. A Hammer is identified by a small real
body (i.e., a small range between the open and closing prices) and
a long lower shadow (i.e., the low is significantly lower than the
open, high, and lose). The body can be empty or filled-in.
3) Piercing line. This is a bullish pattern and the opposite of a dark
cloud cover. The first line is a long black line and the second line
is a long white line. The second line opens lower than the first
line's low, but it closes more than halfway above the first line's real
body.
25

26. 4) Bullish engulfing lines. This pattern is strongly bullish if it occurs
after a significant downtrend (i.e., it acts as a reversal pattern). It
occurs when a small bearish (filled-in) line is engulfed by a large
bullish (empty) line.
5) Morning star. This is a bullish pattern signifying a potential
bottom. The "star" indicates a possible reversal and the bullish
(empty) line confirms this. The star can be empty or filled-in.
26

27. 6) Bullish doji star. A "star" indicates a reversal and a doji indicates
indecision. Thus, this pattern usually indicates a reversal following
an indecisive period. You should wait for a confirmation (e.g., as
in the morning star, above) before trading a doji star. The first line
can be empty or filled in.
Bearish Patterns
27

28. 1) Long black (filled-in) line. This is a bearish line. It occurs when
prices open near the high and close significantly lower near the
period's low.
2) Hanging Man. These lines are bearish if they occur after a
significant uptrend. If this pattern occurs after a significant
downtrend, it is called a Hammer. They are identified by small real
bodies (i.e., a small range between the open and closing prices) and
a long lower shadow (i.e., the low was significantly lower than the
open, high, and close). The bodies can be empty or filled-in.
28

29. 3) Dark cloud cover. This is a bearish pattern. The pattern is more
significant if the second line's body is below the centre of the
previous line's body (as illustrated).
4) Bearish engulfing lines. This pattern is strongly bearish if it
occurs after a significant uptrend (i.e., it acts as a reversal pattern).
It occurs when a small bullish (empty) line is engulfed by a large
bearish (filled-in) line.
29

30. 5) Evening star. This is a bearish pattern signifying a potential top.
The "star" indicates a possible reversal and the bearish (filled-in) line
confirms this. The star can be empty or filled in.
6) Doji star. A star indicates a reversal and a doji indicates indecision.
Thus, this pattern usually indicates a reversal following an indecisive
period. You should wait for a confirmation (e.g., as in the evening star
illustration) before trading a doji star.
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31. 7) Shooting star. This pattern suggests a minor reversal when it
appears after a rally. The star's body must appear near the low price
and the line should have a long upper shadow.
Reversal Patterns
1) Long-legged doji. This line often signifies a turning point. It occurs
when the open and close are the same, and the range between the high
and low is relatively large.
31

32. 2) Dragon-fly doji. This line also signifies a turning point. It occurs
when the open and close are the same, and the low is significantly
lower than the open, high, and closing prices.
3) Gravestone doji. This line also signifies a turning point. It occurs
when the open, close, and low are the same, and the high is
significantly higher than the open, low, and closing prices.
32

33. 4) Star. Stars indicate reversals. A star is a line with a small real body
that occurs after a line with a much larger real body, where the real
bodies do not overlap. The shadows may overlap.
5) Doji star. A star indicates a reversal and a doji indicates indecision.
Thus, this pattern usually indicates a reversal following an indecisive
period. You should wait for a confirmation (e.g., as in the evening
star illustration) before trading a doji star.
Neutral Patterns
33

34. 1) Spinning tops. These are neutral lines. They occur when the
distance between the high and low, and the distance between
the open and close, are relatively small.
2) Doji. This line implies indecision. The security opened and
closed at the same price. These lines can appear in several
different patterns. Double doji lines (two adjacent doji lines)
imply that a forceful move will follow a breakout from the
current indecision.
34

35. 4) Point And Figure Charts
The point and figure chart is not well known or used by the
average investor but it has had a long history of use dating back to the
first technical traders. This type of chart reflects price movements and is
not as concerned about time and volume in the formulation of the points.
The point and figure chart removes the noise, or insignificant price
movements, in the stock, which can distort traders' views of the price
trends. These types of charts also try to neutralize the skewing effect that
time has on chart analysis.
When first looking at a point and figure chart, you will notice a series of
Xs and Os. The Xs represent upward price trends and the Os represent
downward price trends. There are also numbers and letters in the chart;
35

36. these represent months, and give investors an idea of the date. Each box
on the chart represents the price scale, which adjusts depending on the
price of the stock: the higher the stock's price the more each box
represents. On most charts where the price is between $20 and $100, a
box represents $1, or 1 point for the stock. The other critical point of a
point and figure chart is the reversal criteria. This is usually set at three
but it can also be set according to the chartist's discretion. The reversal
criteria set how much the price has to move away from the high or low in
the price trend to create a new trend or, in other words, how much the
price has to move in order for a column of Xs to become a column of Os,
or vice versa. When the price trend has moved from one trend to another,
it shifts to the right, signalling a trend change.
Summary of charts
36

37. 37

38. 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:
Isn’t it hard to see that the trend is up? However, it's not always
this easy to see a trend:
38

39. There are lots of ups and downs in this chart, but there isn't a clear
indication of which direction this security is headed.
A More Formal Definition
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.
39

40. It is an example of an uptrend. Point 2 in the chart is the first high, which
is determined after the price falls from this point. Point 3 is the low that is
established as the price falls from the high. For this to remain an uptrend
each successive low must not fall below the previous lowest point or the
trend is deemed a reversal.
Types of Trend
There are three types of trend:
1. Uptrend
2. Downtrend
3. Sideways/Horizontal Trends
As the names imply, when each successive peak and trough is
higher, it's referred to as an upward trend. If the peaks and troughs are
getting lower, it's a downtrend. When there is little movement up or down
40

41. 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 a Figure 4 to get a sense of how
these three trend lengths might look.
41

42. When analyzing trends, it is important that the chart is constructed
to best reflect the type of trend being analyzed. To help identify
long-term trends, weekly charts or daily charts spanning a five-
year period are used by chartists to get a better idea of the long-
term trend. Daily data charts are best used when analyzing both
intermediate and short-term trends. It is also important to
remember that the longer the trend, the more important it is; for
example, a one-month trend is not as significant as a five-year
trend.
Trend Lines
A trend line is a simple charting technique that adds a line to
a chart to represent the trend in the market or a stock. Drawing a
42

43. 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.
43

44. Channels
A channel, or channel lines, is the addition of two parallel
trend lines that act as strong areas of support and resistance. The
upper trend line connects a series of highs, while the lower trend
line connects a series of lows. A channel can slope upward,
downward or sideways but, regardless of the direction, the
interpretation remains the same. Traders will expect a given
security to trade between the two levels of support and resistance
until it breaks beyond one of the levels, in which case traders can
expect a sharp move in the direction of the break. Along with
clearly displaying the trend, channels are mainly used to illustrate
important areas of support and resistance.
44

45. A descending channel on a stock chart; the upper trend line has
been placed on the highs and the lower trend line is on the lows.
The price has bounced off of these lines several times, and has
remained range-bound for several months. As long as the price
does not fall below the lower line or move beyond the upper
resistance, the range-bound downtrend is expected to continue.
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
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
45

46. 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
46

47. 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 and Chart Patterns
The other use of volume is to confirm chart patterns.
Patterns such as head and shoulders, triangles, flags and other price
patterns can be confirmed with volume, a process which we'll
describe in more detail later in this tutorial. In most chart patterns,
there are several pivotal points that are vital to what the chart is
47

48. able to convey to chartists. Basically, if the volume is not there to
confirm the pivotal moments of a chart pattern, the quality of the
signal formed by the pattern is weakened.
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.
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
48

49. on this assumption. The idea is that certain patterns are seen many times,
and that these patterns signal a certain high probability move in a stock.
Based on the historic trend of a chart pattern setting up a certain price
movement, chartists look for these Patterns to identify trading
opportunities. While there are general ideas and components to every
chart pattern, there is no chart pattern that will tell you with 100%
certainty where a security is headed. This creates some leeway and
debate as to what a good pattern looks like, and is a major reason why
charting is often seen as more of an art than a science. There are two
types of patterns within this area of technical analysis, reversal and
continuation. A reversal pattern signals that a prior trend will reverse
upon completion of the pattern. A continuation pattern, on the other hand,
signals that a trend will continue once the pattern is complete. These
patterns can be found over charts of any timeframe. In this section, we
will review some of the more popular chart patterns.
1. 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
49

50. 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.
___________________________________________________________
___
50

51. Both of these head and shoulders patterns are similar in that there are four
main parts: two shoulders, a head and a neckline. Also, each individual
head and shoulder is comprised of a high and a low. For example, in the
head and shoulders top image shown on the left side, the left shoulder is
made up of a high followed by a low. In this pattern, the neckline is a
level of support or resistance. Remember that an upward trend is a period
of successive rising highs and rising lows. The head and shoulders chart
pattern, therefore, illustrates a weakening in a trend by showing the
deterioration in the successive movements of the highs and lows.
2. Cup and Handle
a cup and handle chart is a bullish continuation pattern in which the
51

52. upward trend has paused but will continue in an upward direction once
the pattern is confirmed.
The price pattern forms what looks like a cup, which is preceded by an
upward trend. The handle follows the cup formation and is formed by a
generally downward/sideways movement in the security's price. Once the
price movement pushes above the resistance lines formed in the handle,
the upward trend can continue.
3. Double Tops and Bottoms
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
52

53. 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.
A double top pattern is shown on the left, while a double bottom
pattern is shown on the right. In the case of the double top pattern, the
price movement has twice tried to move above a certain price level. After
two unsuccessful attempts at pushing the price higher, the trend reverses
and the price heads lower. In the case of a double bottom (shown on the
right), the price movement has tried to go lower twice, but has found
support each time. After the second bounce off of the support, the
security enters a new trend and heads upward.
4. Triangles
53

54. 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
54

55. 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.
5. Flag and Pennants
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
55

56. lines. In both cases, the trend is expected to continue when the price
moves above the upper trend line
6. 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.
Confusion can form with triple tops and bottoms during the formation of
the pattern because they can look similar to other chart patterns. After the
first two support/resistance tests are formed in the price movement, the
pattern will look like a double top or bottom, which could lead a chartist
to enter a reversal position too soon.
56

57. 7. Rounding Bottom
a rounding bottom, also referred to as a saucer bottom, is a long-term
reversal pattern that signals a shift from a downward trend to an upward
trend. This pattern is traditionally thought to last anywhere from several
Months to several years.
57

58. A rounding bottom chart pattern looks similar to a cup and handle pattern
but without the handle. The long-term nature of this pattern and the lack
of a confirmation trigger, such as the handle in the cup and handle, make
it a difficult pattern.
SUPPORT AND RESISTANCE:-
Once you understand the concept of a trend, the next major concept
is that of support and resistance. You'll often hear technical analysts talk
about the ongoing battle between the bulls and the bears, or the struggle
between buyers (demand) and sellers (supply). This is revealed by the
prices a security seldom moves above (resistance) or below (support).
58

59. 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.
59

60. 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
60

61. 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.
In almost every case, a stock will have both a level of support and
a level of resistance and will trade in this range as it bounces
between these levels.
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
61

62. 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.
62

63. 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.
63

64. 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
64

65. likelihood that it will reverse.
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
65

66. 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
66

67. the calculation is not generally required for most traders because most
charting 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.
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
67

68. 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.
Another method of determining momentum is to look at the order of a
pair of moving averages. When a short-term average is above a longer-
term average, the trend is up. On the other hand, a long-term average
above a shorter-term average signals a downward movement in the trend.
Moving average trend reversals are formed in two main ways: when
the price moves through a moving average and when it moves through
moving average crossovers. The first common signal is when the price
moves through an important moving average. For example, when the
price of a security that was in an uptrend falls below a 50-period moving
average, it is a sign that the uptrend may be reversing.
68

69. 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.
69

70. If the periods used in the calculation are relatively short, for example 15
and 35, this could signal a short-term trend reversal. On the other hand,
when two averages with relatively long time frames cross over (50 and
200, for example), this is used to suggest a long-term shift in trend.
Another major way moving averages are used is to identify support and
resistance levels. It is not uncommon to see a stock that has been falling
stop its decline and reverse direction once it hits the support of a major
moving average. A move through a major moving average is often used
as a signal by technical traders that the trend is reversing. For example, if
the price breaks through the 200-day moving average in a downward
direction, it is a signal that the uptrend is reversing.
70

71. Moving averages are a powerful tool for analyzing the trend in a security.
They provide useful support and resistance points and are very easy to
use. The most common time frames that are used when creating moving
averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-
day average is thought to be a good measure of a trading year, a 100-day
average of a half a year, a 50-day average of a quarter of a year, a 20-day
average of a month And 10 – day average of two weeks. Moving
averages help technical traders smooth out some of the noise that is found
in day-to-day price movements, giving traders a clearer view of the price
trend. So far we have been focused on price movement, through charts
and averages. In the next section, we'll look at some other techniques
used to confirm price movement and patterns.
Technical Indicators
71

72. 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. 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.
72

73. 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.
MACD
Overview
The MACD ("Moving Average Convergence/Divergence") is a trend
following momentum indicator that shows the relationship between two
moving averages of prices. The MACD was developed by Gerald Appel,
publisher of Systems and Forecasts. The MACD is the difference
between a 26-day and 12-day exponential moving average. A 9-day
exponential moving average, called the "signal" (or "trigger") line is
plotted on top of the MACD to show buy/sell opportunities. (Apple
specifies exponential moving averages as percentages. Thus, he refers to
these three moving averages as 7.5%, 15
73

74. 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.
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
74

75. An indication that an end to the current trend may be near occurs when
the MACD diverges from the security. A bearish divergence occurs when
the MACD is making new lows while prices fail to reach new lows. A
bullish divergence occurs when the MACD is making new highs while
prices fail to reach new highs. Both of these divergences are most
significant when they occur at relatively overbought/oversold levels.
MOMENTUM
Overview
The Momentum indicator measures the amount that a security's price has
changed over a given time span.
Interpretation
The interpretation of the Momentum indicator is identical to the
interpretation of the Price ROC. Both indicators display the rate-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.
VOLUME
75

76. Overview
Volume is simply the number of shares (or contracts) traded
during a specified time frame (e.g., hour, day, week, month, etc). The
analysis of volume is a basic yet very important element of technical
analysis. Volume provides clues as to the intensity of a given price move.
Interpretation
Low volume levels are characteristic of the indecisive expectations
that typically occur during consolidation periods (i.e., periods where
prices move sideways in a trading range). Low volume also often occurs
during the indecisive period during market bottoms. High volume levels
are characteristic of market tops when there is a strong consensus that
Prices will move higher. High volume levels are also very common at the
beginning of new trends (i.e., when prices break out of a trading range).
Just before market bottoms, volume will often increase due to panic-
driven selling.
Volume can help determine the health of an existing trend. 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.
76

77. RATE OF CHANGE (ROC)
Rate of change measures the rate at which prices rise or fall.
It is based on the principle that prices usually rise and fall at the fastest
pace well ahead of their peak and before their trough respectively.
10 – Day ROC
The concept of ROC can be explained with the help of a single example.
A ball thrown into the Air generally shoots up with speed but
subsequently shows down considerably before it turns to come down
again. The loss of upward momentum that occurs before the ball changes
course can be seen in the stock market also. Before peaking out, share
process registers a noticeable decrease in momentum.
THE CALCULATION OF 10 DAY RATE OF CHANGE
DA SHARE SHARE PRICE 10DAYS ROC 10 DAYS
Y PRICE AGO AGO
1 2 3 (4) =(2)/(3)
1 2079.5
2 2065.05
3 2106.05
4 2165.2
5 2151.1
6 2178.1
7 2189.35
8 2160
9 2125
10 2197
11 2247.95 2079.5 1.081
12 2343 2065.05 1.135
13 2421.35 2106.05 1.150
14 2448 2165.2 1.131
15 2252.95 2151.1 1.047
16 2270 2178.1 1.042
17 2205.15 2189.35 1.007
77

78. 18 2119 2160 0.981
19 2229.95 2125 1.049
20 2250.5 2197 1.024
21 2206 2247.95 0.981
22 2242.2 2343 0.957
23 2167 2421.35 0.895
24 2148.65 2448 0.878
25 2151 2252.95 0.955
26 2240.05 2270 0.987
27 2309.25 2205.15 1.047
28 2328.6 2119 1.099
29 2357.7 2229.95 1.057
30 2292 2250.5 1.018
The concept of ROC can be explained with the help of a single example.
A ball thrown into the air generally shoots up with speed but
subsequently shows down considerably before it turns to come down
again. The loss of upward momentum that occurs before the ball changes
course can be seen in the stock market also. Before peaking out, share
process registers a noticeable decrease in momentum. To measure the
rate of change, the ratio of the most recent closing price to the price for a
certain number of days in the past is worked out. To calculate a 10 days
78

79. ROC, the latest closing price is divided by the closing price of the scrip
10 days ago. If the latest price is higher than that of the historical price
for the ten previous days, the ROC value will be above the line 1 and vice
versa. In the following table an example of 10 days ROC is explained.
Under column 2 the share price movement of a company is provided for
20 days while under column 3 the prices ruling 10 days ago has been
taken.
In the last column, the ROC values are arrived at by dividing the current
day’s price by the price 10 days ago.
The ROC values are available from the 11th day only as for the first 10
trading days. The 10 days back share prices are not available. It is worth
noting that the share prices are available only on the trading that actually
took place in the market.
Therefore, the ROC is computed for 10 trading days and not 10 calendar
days.
The share price has been increased by Re. 1 on every day trading day
from day 1 to day 15. However, the ROC declined continuously from
the 11th day to 15th day, though the share price in rupees terms increased.
This indicates that though there was a share price rise in absolute terms,
in percentage terms the rise in share price declined during that period.
• If the ROC line is above 1; the current day price is higher than
that of 10 days ago.
79

80. • If the ROC line is above 1 and rising; the difference between the
current day price and 10 days back price grows at an increasing
rate (bullish signal).
• If ROC line is above 1, but declining; the price rises at a lower
rate than the earlier growth rate (bearish signal)
• If the ROC line is below 1, the current day’s price is lower than
the price 10 days ago.
• If the ROC line is below 1 and falling, the difference between 10
days price and 10 days back price grows at a faster rate (bearish
signal).
• If the ROC line is below 1, but rising, the rate of decline slows
down (bullish signal).
• The ROC line is so constructed that it is always a step ahead of
the price movement. It gives an advance signal before the share
price line takes a reversal direction.
Relative Strength Index
Relative Strength Index (RSI) us is one of the very few sophisticated
Oscillators used in technical analysis. The others which we have already
discussed in the previous issues are stochastic and MACD. The rate of
80

81. change and momentum are some of the widely used simple oscillators.
There are some flaws like erratic movement due to sudden drop or rise in
the price movement even in a single trading day in the usage of simple
oscillators. For instance, in a 10 day momentum, a sharp advance or
decline ten days back can cause sudden shifts in momentum line even if
there is a marginal or no change in current prices. Therefore, it is
necessary to reduce these distortions and smoothen the oscillator
indicator distortions and smoothen the oscillator indictor distortion and
smoothen the oscillator indicator. The other problem in simple
oscillators is that there is no specified range on vertical scale. Mainly to
address these two major problems of simple oscillators RSI was
developed by J. Welles Wilder, Jr. in 1978. RSI indicator provides not
only the required smoothing but also 0 and 100 as lower and upper limits
respectively for its vertical scale.
RSI is calculated using the following formula.
RSI=100 – {100 / (1+RS)}
Where RS = Average of n periods price gains
Average of n periods price losses
7 day RS value = (8/7) / (4/7) = 1.143 / 0.571=2
RSI= 100 – {100 / (1+RS)}
= 100 – {100 / (1+2)}
=100- 33.33 = 66.67.
81

82. The RSI value for the seventh day is 66.67. For calculating the RSI value
for the eighth day, we have to exclude the first day closing price and
include the price on the eighth day. We can calculate RSI for any time
period. The most widely used period is 14 days. Some technical analysts
also use lesser time periods like 5 - day, 7 – day, 9 – day to get the
quicker signals. Like I any other Oscillators, shorter the time period, the
more sensitive and volatile the RSI becomes. Therefore, to reduce the
misleading signals Wilder recommended and used a 14 day period for
constructing RSI.
RSI CALCULATION
CHANGE IN PRICE OVER
PREVIOUS DAY
DAY CLOSING PRICE GAIN LOSS
1 43 0 0
2 45 2 0
3 44 0 1
4 46 2 0
5 45 0 1
6 43 0 2
7 47 4 0
TOTAL 8 4
Interpretation:
• The RSI values are plotted on chart with a vertical scale of 0 to
100.
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83. • If the RSI moves above the value 70, it is considered as
overbought.
• If the RSI moves below the value 30, it is treated as an oversold
zone.
In other words, there may be down trends in the price after the RSI
moving above the 70 level and prices may recover and look up after the
RSI falls below 30 level. Generally, RSI indicator crosses the 70 level
much before the share price touches the peak. Similarly, RSI line goes
below the 30 level well ahead of price lifting the bottom. Hence, RSI
gives an advance signal for reversal share price movements.
Failure swings: we can see the failure in rallies and also in declines when
the RSI is above 70 and 30 respectively. Failure “A” in rally when the
RSI rises above 70 rises again but fails to reach the level 70 and below
the prior lower level. This is a clear sell signal. Failure at bottom of
when the RSI in a downtrend. Failure “B” explains the failure in decline
when fails to set new low and starts an uptrend to exceed previous peak.
Divergence:
According to Wilder, divergence is the most indicative character of the
RSI which gives a warning signal for likely reversal in share movement.
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84. Hence, the divergence is between the RSI line and the share price. For
instance, if the RSI line is falling below from the level of 80 to 70 and a
same time the share price is still in an uptrend, it gives as indication that
the share price is also likely to reverse its direction shortly. This
divergence gives a sell signal.
Similarly, we get a buy signal when the RSI line is moving up below the
level 30 and at the same time the share price is still continuing in a
downtrend.
The RSI indicator simply means
• Buy, when the RSI line is crossing up through the 50 level and
• Sell, when the RSI line is crossing down through the 50 level.
We can also identify the chart patterns like triangles, flags, rectangles in
the RSI line and interpret the same way as in price chart. Support and
Resistance levels also can be drawn for RSI charts.
These Oscillators are quite useful only for short terms investors and
traders. These are not useful for long term investors, because they cannot
simply sell their shares for the simple reason that RSI has moved above
the 70 level. The first entry of RSI into the overbought zone is only a
first warning signal. One has to wait for further confirmations before
really liquidating his portion
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85. TECHNICAL ANALYSIS OF SBIN
State Bank of India- History
The origin of the State Bank of India goes back to the first decade of
the nineteenth century with the establishment of the Bank of
Calcutta in Calcutta on 2 June 1806. Three years later the bank
received its charter and was re-designed as the Bank of Bengal (2
January 1809). A unique institution, it was the first joint-stock bank
of British India sponsored by the Government of Bengal. The Bank
of Bombay (15 April 1840) and the Bank of Madras (1 July 1843)
followed the Bank of Bengal. These three banks remained at the apex
of modern banking in India till their amalgamation as the Imperial
Bank of India on 27 January 1921.
1955 - On 1st July State Bank of India was constituted under the
State Bank of India Act 1955, for the purpose of taking over the
undertaking and business of the Imperial Bank of India. The
Imperial Bank of India
85

86. was founded in 1921 under the Imperial Bank of India Act 1920.
The Bank transacts general banking business of every description
including,
foreign exchange, merchant banking and mutual funds.
Management of - SBI
Name Designation
Pratip Chaudhuri Chairman / Chair Person
A Krishna Kumar Managing Director
Ashok Jhunjhunwala Director
S Venkatachalam Director
G D Nadaf Director
Parthasarthy Iyengar Director
Subir Vithal Gokran Director
Deepak Ishwarbhai Amin Non Official Part Time Director
Name Designation
Hemant G Contractor Managing Director
Diwakar Gupta Managing Director
Dileep C Choksi Director
D Sundaram Director
Rashpal Malhotra Non Official Part Time Director
D K Mittal Director
Jyoti Bhushan Mohapatra Director
86

87. CONCLUSION:-
Technical Analysis of State Bank of India:
3 Years data taken (1st-Jan-2009 to 27th-Feb-2012)
Bar Chart
Candle Stick Chart
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88. Line Chart
88

89. Rate of Change (ROC)
Relative Strength Index (RSI)
89

90. When 50 DMA crosses 200 DMA in Upside that time In
Technical words it’s called as GOLDEN CROSS it’s a strong
bullish signal
90

91. As per charts SBI has strong support @ 2040 & 1880 &
Resistance @ 2190, 2390 & 2450.
Whereas RSI is crossing up 50 level which Indicate Buy Signal.
and if we see 10 days ROC is above 1 but declining the price
rises at lower rate than the earlier growth rate which indicate
bearish signal. But if we take 3 years data and calculate ROC
then we can see “ROC line is above 1 and rising; the difference
between the current day price and 10 days back price grows at an
increasing rate (bullish signal)”
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92. Recommendation: - Buy SBI at current level i.e.
2100-2130,
Short term Target 2190 & 2390, Stop Loss @ 2040
Long Term Target  above 2390 2540 and above this
level 2600 - - 2700 Targets is there, Stop Loss @ 2040
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93. BIBLIOGRAPHY
www.investopedia.com
www.onlincetradingconcepts.com
www.nseindia.com
www.bseindia.com
And Help taken by my office colleague Mr
Chandrashekhar Khamkar (Reliance Securities) who has
good knowledge of technical analysis.
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