SECURITY ANALYSIS

Introduction

Investment decision depends on securities to be bought, held or sold.

Buying security is based on highest return per unit of risk or lowest risk per unit of return. Selling security does not depend
on any such requirement.

A security considered for buying today may not be attractive tomorrow due to management policy changes in the
company or economic policy changes adopted by the government. The reverse is also true. Therefore, analysis of the
security on a continuous basis is a must.
Security Analysis involves a systematic analysis of the risk return profiles of various securities which is to help a rational investor
to estimate a value for a company from all the price sensitive information/data so that he can make purchases when the
market under-prices some of them and thereby earn a reasonable rate of return.

Two approaches viz. fundamental analysis and technical analysis are in vogue for carrying out Security Analysis.
In fundamental analysis, factors affecting risk-return characteristics of securities are looked into while in technical analysis,
demand/ supply position of the securities along with prevalent share price trends are examined.

A. FUNDAMENTAL ANALYSIS

Fundamental Analysis is based on the assumption that the share prices depend upon the future dividends expected by the
shareholders.

The present value of the future dividends can be calculated by discounting the cash flows at an appropriate discount rate and
is known as the 'intrinsic value of the share'. A share that is priced below the intrinsic value must be bought, while a share
quoting above the intrinsic value must be sold.

Price of Shares = D1/Re – g or D0(1+G)/Re – g or E1* DPS/ Re – g or E0(1+G) * DPS/ Re - g

The key variables that an investor must monitor in order to carry out his fundamental analysis are economy wide factors,
industry wide factors and company specific factors.
1. Economic Analysis
Macro-economic factors e.g. historical performance of the economy in the past/ present and expectations in future, growth
of different sectors of the economy in future with signs of stagnation/degradation at present to be assessed while
analyzing the overall economy.

Trends in peoples’ income and expenditure reflect the growth of a particular industry/company in future. Consumption
affects corporate profits, dividends and share prices in the market.

Factors Affecting Economic Analysis

Some of the economy wide factors are discussed as under:
(a) Growth Rates of National Income and Related Measures: what is important is the difference between the nominal
growth rate quoted by GDP and the ‘real’ growth after taking inflation into account.
(b) Growth Rates of Industrial Sector: This can be further broken down into growth rates of various industries or groups of
industries if required. The growth rates in various industries are estimated based on the estimated demand for its
products.
(c) Inflation: Inflation is measured in terms of either wholesale prices (the Wholesale Price Index or WPI) or retail prices
(Consumer Price Index or CPI). The demand in some industries, particularly the consumer products industries, is significantly
influenced by the inflation rate.
(d) Monsoon: Because of the strong forward and backward linkages, monsoon is of great concern to investors in the stock
market too.

Techniques Used in Economic Analysis

Gross National Product (GNP) is used to measure national income as it reflects the growth rate in economic activities and
has been regarded as a forecasting tool for analyzing the overall economy along with its various components during a particular
period.
Some of the techniques used for economic analysis are:
(a) Anticipatory Surveys: They help investors to form an opinion about the future state of the economy. It incorporates
expert opinion on construction activities, expenditure on plant and machinery, levels of inventory – all having a
definite bearing on economic activities. Also future spending habits of consumers are taken into account. Survey
results do not guarantee that intentions surveyed would materialize.

(b) Barometer/Indicator Approach: Various indicators are used to find out how the economy shall perform in the future.
The indicators have been classified as under:
(i) Leading Indicators: They lead the economic activity in terms of their outcome. They relate to the time series data of the
variables that reach high/low points in advance of economic activity.
(ii) Roughly Coincidental Indicators: They reach their peaks and troughs at approximately the same in the economy.
(iii) Lagging Indicators: They are time series data of variables that lag behind in their consequences vis-a- vis the
economy. They reach their turning points after the economy has reached its own already.

Money supply in the economy also affects investment decisions. Rate of change in money supply in the economy affects GNP,
corporate profits, interest rates and stock prices. Increase in money supply fuels inflation. stock prices go up during
inflationary period.
(C) Economic Model Building Approach: In this approach, a precise and clear relationship between dependent and
independent variables is determined. GNP model building or sectoral analysis is used in practice through the use of
national accounting framework.

2. Industry Analysis
When an economy grows, it is very unlikely that all industries in the economy would grow at the same rate. So it is necessary
to examine industry specific factors, in addition to economy-wide factors.
Factors Affecting Industry Analysis
The following factors may particularly be kept in mind while assessing the factors relating to an industry.
(a) Product Life-Cycle: An industry usually exhibits high profitability in the initial and growth stages, medium but steady
profitability in the maturity stage and a sharp decline in profitability in the last stage of growth.
(b) Demand Supply Gap: Excess supply reduces the profitability of the industry because of the decline in the unit price realization,
while insufficient supply tends to improve the profitability because of higher unit price realization.
(c) Barriers to Entry: Any industry with high profitability would attract fresh investments. The potential entrants to the
industry, however, face different types of barriers to entry. Some of these barriers are innate to the product and the
technology of production, while other barriers are created by existing firms in the industry.
(d) Government Attitude: The attitude of the government towards an industry is a crucial determinant of its prospects.
(e) State of Competition in the Industry: Factors to be noted are- firms with leadership capability and the nature of
competition amongst them in foreign and domestic market, type of products manufactured viz. homogeneous or highly
differentiated, demand prospects through classification viz customer-wise/area-wise, changes in demand patterns in the
long/immediate/ short run, type of industry the firm is placed viz. growth, cyclical, defensiveor decline.
(f) Cost Conditions and Profitability: The price of a share depends on its return, which in turn depends on profitability of the
firm. Profitability depends on the state of competition in the industry, cost control measures adopted by its units and
growth in demand for its products.
(g) Technology and Research: They play a vital role in the growth and survival of a particular industry. Technology is subject
to change very fast leading to obsolescence. Industries which update themselves have a competitive advantage over others
in terms of quality, price etc.

Techniques Used in Industry Analysis

The techniques used for analyzing the industry wide factors are:
(a) Regression Analysis: Investor diagnoses the factors determining the demand for output of the industry through product
demand analysis. Factors to be considered are GNP, disposable income, per capita consumption / income, price elasticity
of demand. For identifying factors affecting demand, statistical techniques like regression analysis and correlation are
used.

(b) Input – Output Analysis: It reflects the flow of goods and services through the economy, intermediate steps in production
process as goods proceed from raw material stage through final consumption. This is carried out to detect changing
patterns/trends indicating growth/decline of industries.
3. Company Analysis
Economic and industry framework provides the investor with proper background against which shares of a particular
company are purchased. This requires careful examination of the company's quantitative and qualitative fundamentals.
(a) Net Worth and Book Value: Net Worth is sum of equity share capital, preference share capital and free reserves less
intangible assets and any carry forward of losses. The total net worth divided by the number of shares is the much talked
about book value of a share
(b) Sources and Uses of Funds: The identification of sources and uses of funds is known as Funds Flow Analysis. One of the
major uses of funds flow analysis is to find out whether the firm has used short-term sources of funds to finance long-
term investments. Such methods of financing increases the risk of liquidity crunch for the firm. Many a firm has come
to grief because of this mismatch between the maturity periods of sources and uses of funds.
(c) Cross-Sectional and Time Series Analysis: One of the main purposes of examining financial statements is to compare
two firms, compare a firm against some benchmark figures for its industry and to analyze the performance of a firm
over time.
(d) Size and Ranking: In this regard the net capital employed, the net profits, the return on investment and the sales figures of
the company under consideration may be compared with similar data of other companies in the same industry group.
(e) Growth Record: The growth in sales, net income, net capital employed and earnings per share of the company in the
past few years should be examined. The following three growth indicators may be particularly looked into: (a) Price
earnings ratio, (b) Percentage growth rate of earnings per annum, and (c) Percentage growth rate of net block.
(f) Financial Analysis: An analysis of its financial statements for the past few years would help the investment manager in
understanding the financial solvency and liquidity, the efficiency with which the funds are used, the profitability, the
operating efficiency and the financial and operating leverages of the company. For this purpose, certain fundamental
ratios have to be calculated.
From the investment point of view, the most important figures are earnings per share, price earning ratios, yield, book
value and the intrinsic value of the share.
Various other ratios to measure profitability, operating efficiency and turnover efficiency of the company may also be
calculated. The return on owners' investment, capital turnover ratio and the cost structure ratios may also be worked
out.
To examine the financial solvency or liquidity of the company, the investment manager may work out current ratio,
liquidity ratio, debt-equity ratio, etc. These ratios will provide an overall view of the company to the investment analyst. He
can analyse its strengths and weaknesses and see whether it is worth the risk or not.
(g) Competitive Advantage: Another business consideration for investors is competitive advantage. A company's long-term
success is driven largely by its ability to maintain its competitive advantage. Powerful competitive advantages, such as
Apple’s brand name and Samsung’s domination of the mobile market, create a shield around a business that allows it to
keep competitors at a distance.
(h) Quality of Management: Every investment manager knows that the shares of certain business houses command a higher
premium than those of similar companies managed by other business houses. This is because of the quality of
management, the confidence that investors have in a particular business house, its policy vis-a-vis its relationship with
the investors, dividend and financial performance record of other companies in the same group, etc. Quality of
management has to be seen with reference to the experience, skills and integrity of the persons at the helm of affairs of
the company.
(i) Corporate Governance: Following factors are to be kept in mind while judging the effectiveness of corporate
governance of an organization:
Whether company is complying with all aspects of SEBI (LODR) Regulations 2015?
How well corporate governance policies serve stakeholders?
 Quality and timeliness of company financial disclosures.
Whether quality independent directors are inducted?

(j) Regulation: Regulations plays an important role in maintaining the sanctity of the corporate form of organization. In Indian
listed companies, Companies Act, Securities Contract and Regulation Act and SEBI Act basically look after regulatory
aspects of a company. A listed company is also continuously monitored by SEBI which through its guidelines and regulations
protect the interest of investors.
Further, a company which is dealing with companies outside India, needs to comply with Foreign Exchange Management
Act (FEMA) also. In this scenario, the Reserve Bank of India (RBI) does a continuous monitoring.
(k) Location and Labour-Management Relations: The locations of the company's manufacturing facilities determines its
economic viability which depends on the availability of crucial inputs like power, skilled labour and raw-materials, etc.
Nearness to markets is also a factor to be considered.
In the past few years, the investment manager has begun looking into the state of labour- management relations in
the company under consideration and the area where it is located.
(l) Pattern of Existing Stock Holding: An analysis of the pattern of existing stock holdings of the company would also be
relevant. This would show the stake of various parties in the company.
(m)Marketability of the Shares: Another important consideration for an investment manager is the marketability of the shares
of the company. Mere listing of a share on the stock exchange does not automatically mean that the share can be sold or
purchased at will. There are many shares which remain inactive for long periods with no transactions being affected. To
purchase or sell such scrips is a difficult task. In this regard, dispersal of shareholding with special reference to the extent
of public holding should be seen. The other relevant factors are the speculative interest in the particular scrip, the particular
stock exchange where it is traded and the volume of trading.

Techniques Used in Company Analysis

Through the use of statistical techniques the company wide factors can be analyzed. Some of the techniques are discussed
as under:
(a) Correlation & Regression Analysis: Simple regression is used when inter relationship covers two variables. For more
than two variables, multiple regression analysis is followed. The main advantage in such analysis is the determination of
the forecasted values along with testing the reliability of the estimates.
(b) Trend Analysis: The relationship of one variable is tested over time using regression analysis. It gives an insight
to the historical behavior of the variable.
(c) Decision Tree Analysis: Information relating to the probability of occurrence of the forecasted value is considered
useful. A range of values of the variable with probabilities ofoccurrence of each value is taken up. The limitations are
reduced through decision tree analysis and use of simulation techniques.
In decision tree analysis, the decision is taken sequentially with probabilities attached to each sequence. To obtain
the probability of final outcome, various sequential decisions given along with probabilities, the probabilities of
each sequence is to be multiplied and them summed up.

Thus, fundamental analysis is basically an examination of the economic and financial aspects of a company with the
aim of estimating future earnings and dividend prospects. It includes an analysis of the macro-economic and political
factors which will have an impact on the performance of the company. After having analysed all the relevant information
about the company and its relative strength vis-a-vis other companies in the industry, the investor is expected to decide
whether he should buy or sell the securities
 2. TECHNICAL ANALYSIS
Technical Analysis is a method of share price movements based on a study of price graphs or charts on the assumption
that share price trends are repetitive, that since investor psychology follows a certain pattern, what is seen to have happened
before is likely to be repeated.
Technical Analysis is based on the following assumptions:
(i) The market value of stock depends on the supply and demand for a security.
(ii) The supply and demand are actually governed by several factors which can be rational or irrational. For instance,
recent initiatives taken by the Government to reduce the Non-Performing Assets (NPA) burden of banks may result in the
demand for banking stocks.
(iii) Stock prices generally move in trends which continue for a substantial period of time. Therefore, if there is a bull market
going on, there is every possibility that there will soon be a substantial correction which will provide an opportunity to the
investors to buy shares at that time.
(iv) Technical analysis relies upon chart analysis which shows the past trends in stock prices rather than the information
in the financial statements like balance sheet or profit and loss account.

Principles of Technical Analysis

Technical analysis is based on the following three principals:
a. The Market Discounts Everything: Although many experts criticize technical analysis because it only considers price
movements and ignores fundamental factors but the Efficient Market Hypothesis (discussed later in detail) contradicts it
according to which a company’s share price already reflects everything that has or could affect a company and
it includes fundamental factors. So, technical analysts generally have the view that a company’s share price
includes everything including the fundamentals of a company.
b. Price Moves in Trends: Technical analysts believe that prices move in trends. In other words, a stock price is more
likely to continue a past trend than move in a different direction.
c. History Tends to Repeat Itself: Technical analysts believe that history tends to repeat itself. Technical analysis uses chart
patterns to analyze subsequent market movements to understand trends. While many form of technical analysis
have been used for many years, they are still considered to be significant because they illustrate patterns in price
movements that often repeat themselves.

Theories of Technical Analysis

1. The Dow Theory
It was originated by Charles Dow, the founder of Dow Jones Company in late nineteenth century.
The Dow Theory is based upon the movements of two indices, constructed by Charles Dow, Dow Jones Industrial Average
(DJIA) and Dow Jones Transportation Average (DJTA).
The movements of the market are divided into three classifications, all going at the same time; the primary movement,
the secondary movement, and the daily fluctuations.
The primary movement is the main trend of the market, which lasts from one year to 36 months or longer. This trend is
commonly called bear or bull market.
The secondary movement of the market is shorter in duration than the primary movement, and is opposite in direction. It
lasts from two weeks to a month or more.
The daily fluctuations are the narrow movements from day-to-day. These fluctuations are not part of the Dow Theory
interpretation of the stock market. However, daily movements must be carefully studied, along with primary and secondary
movements, as they go to make up the longer movement in the market.
Thus, the Dow Theory’s purpose is to determine where the market is and where is it going, although not how far or high.
The theory, in practice, states that if the cyclical swings of the stock market averages are successively higher and the
successive lows are higher, then the market trend is up and a bullish market exists.
Contrarily, if the successive highs and successive lows are lower, thenthe direction of the market is down and a bearish
market exists.
Charles Dow proposed that the primary uptrend would have three moves up, the first one being caused by accumulation
of shares by the far-sighted, knowledgeable investors, the second move would be caused by the arrival of the first
reports of good earnings by corporations, and the last move up would be caused by widespread report of financial
well-being of corporations. The third stage would also see rampant speculation in the market.
Towards the end of the third stage, the far- sighted investors, realizing that the high earnings levels may not be sustained, would
start selling, starting the first move down of a downtrend, and as the non-sustainability of high earnings is confirmed, the
second move down would be initiated and then the third move down would result from distress selling in the market.

2. Elliot Wave Theory

Inspired by the Dow Theory and by observations found throughout nature, Ralph Elliot formulated Elliot Wave Theory in 1934.
This theory was based on analysis of 75 years stock price movements and charts. From his studies, he defined price movements
in terms of waves. Accordingly, this theory was named Elliot Wave Theory. Elliot found that the markets exhibited certain repeated
patterns or waves. As per this theory wave is a movement of the market price from one change in the direction to the next
change in the same direction. These waves are resulted from buying and selling impulses emerging from the demand and supply
pressures on the market. Depending on the demand and supply pressures, waves are generated in the prices.
As per this theory, waves can be classified into two parts:-
(a) Impulsive Patterns-(Basic Waves) - In this pattern there will be 3 or 5 waves in a given direction (going upward
or downward). These waves shall move in the direction of the basic movement. This movement can indicate bull
phase or bear phase.
(b) Corrective Patterns- (Reaction Waves) - These 3 waves are against the basic direction of the basic movement.
Correction involves correcting the earlier rise in case of bull market and fall in case of bear market.
As shown in the following diagram waves 1, 3 and 5 are directional movements, which are separated or corrected by wave
2 & 4, termed as corrective movements.

3. Random Walk Theory

While discussing the Dow Jones theory, we have seen that the theory is based on the assumption that the behaviour of stock
market itself contains trends which give clues to the future behaviour of stock market prices. Thus, supporters of the theory
argue that market prices can be predicted if their patterns can be properly understood. Such analysis of stock market patterns
is called technical analysis. Apart from this theory there are many approaches to technical analysis. Most of them, however,
involve a good deal of subjective judgment.
Many investment managers and stock market analysts believe that stock market prices can never be predicted because they
are not a result of any underlying factors but are mere statistical ups and downs. This hypothesis is known as Random Walk
hypothesis which states that the behaviour of stock market prices is unpredictable and that there is no relationship between
the present prices of the shares and their future prices. Proponents of this hypothesis argue that stock market prices are
independent. A British statistician, M. G. Kendell, found that changes in security prices behave nearly as if they are generated
by a suitably designed roulette wheel for which each outcome is statistically independent of the past history. In other words,
the fact that there are peaks and troughs in stock exchange prices is a mere statistical happening – successive peaks and
troughs are unconnected. In the layman's language it may be said that prices on the stock exchange behave exactly the way
a drunk would behave while walking in a blind lane, i.e., up and down, with an unsteady way going in any direction he likes,
bending on the side once and on the other side the second time.

The supporters of this theory put out a simple argument. It follows that:
(a) Prices of shares in stock market can never be predicted.
(b) The reason is that the price trends are not the result of any underlying factors, but that they represent a statistical
expression of past data.
(c) There may be periodical ups or downs in share prices, but no connection can be established between two
successive peaks (high price of stocks) and troughs (low price of stocks).

Dowtheory

Dowtheory

Eliot wave theory

EFFICIENT MARKET THEORY (EFFICIENT MARKET HYPOTHESIS)
As per this theory, at any given time, all available price sensitive information is fully reflected in securities' prices.
Thus, this theory implies that no investor can consistently outperform the market as every stock is appropriately
priced based on available information.
Stating otherwise this theory states that no one can "beat the market" hence making it impossible for investors to
either purchase undervalued stocks or sell stocks for inflated prices as stocks are always traded at their fair value on
stock exchanges.

Level of Market Efficiency

That price reflects all available information, the highest order of market efficiency. According to Eugene Fama, there
exist three levels of market efficiency:-
(i) Weak form efficiency – Price reflects all information found in the record of past prices and volumes.
(ii) Semi – Strong efficiency – Price reflects not only all information found in the record of past prices and volumes
but also all other publicly available information.
(iii) Strong form efficiency – Price reflects all available information public as well as private.

Weak form efficiency

According to the Weak form Efficient Market Theory current price of a stock reflect all information found in the record of
past prices and volumes. This means that there is no relationship between the past and future price movements.
Three types of tests have been employed to empirically verify the weak form of Efficient Market Theory- Serial Correlation
Test, Run Test and Filter Rule Test.

Semi – Strong efficiency

Semi-strong form efficient market theory holds that stock prices adjust rapidly to all publicly available information.
By using publicly available information, investors will not be able to earn above normal rates of return after considering the risk
factor.

Strong form efficiency

According to the Efficient Market Theory, all available information, public or private, is reflected in the stock prices. This
represents an extreme hypothesis.

Challenges to the Efficient Market Theory

(a) Information inadequacy – Information is neither freely available nor rapidly transmitted to all participants in the stock
market. There is a calculated attempt by many companies to circulate misinformation.

(b) Limited information processing capabilities – Human information processing capabilities are sharply limited.
According to Herbert Simon every human organism lives in an environment which generates millions of new bits of
information every second but the bottlenecks of the perceptual apparatus does not admit more than thousand bits per
seconds and possibly much less.
(c) Irrational Behaviour – It is generally believed that investors’ rationality will ensure a close correspondence between
market prices and intrinsic values. But in practice this is not true. J. M. Keynes argued that all sorts of consideration
enter into the market valuation which is in no way relevant to the prospective yield. This was confirmed by L. C. Gupta
who found that the market evaluation processes work haphazardly almost like a blind man firing a gun. The market
 seems to function largely on hit or miss tactics rather than on the basis of informed beliefs about the long term prospects of
individual enterprises.
(d) Monopolistic Influence – A market is regarded as highly competitive. No single buyer or seller is supposed to have
undue influence over prices. In practice, powerful institutions and big operators wield great influence over the market.
The monopolistic power enjoyed by them diminishes the competitiveness of the market.

Charting Techniques
Broadly technical analysts use four types of charts for analyzing data. They are as follows:
(i) Line Chart: In a line chart, lines are used to connect successive day’s prices. The closing price for each period is
plotted as a point. These points are joined by a line to form the chart. The period may be a day, a week or a month.

(ii) Bar Chart: In a bar chart, a vertical line (Bar) represents the lowest to the highest price, with a short horizontal line
protruding from the bar representing both the opening and closing prices for the period. For example, the prices of
share of A Ltd. for 6 days are as follows:

Days Opening Price (`) High Price (`) Low Price (`) Closing Price (`)
01-Jan 58 72 52 68
02-Jan 71 73 58 64.30
03-Jan 66 67 56 57
04-Jan 58.50 75.50 55 72
05-Jan 73.50 75 58 71
06-Jan 74.50 76 55 74.50

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(iii) Japanese Candlestick Chart: Like Bar chart this chart also shows the same information i.e. Opening, Closing, Highest
and Lowest prices of any stock on any day but this chart more visualizes the trend as change in the opening and
closing prices is indicated by the color of the candlestick.

(iv) Point and Figure Chart: Point and Figure charts are more complex than line or bar charts. They are used to detect
reversals in a trend. For plotting a point and figure chart, we have to first decide the box size and the reversal criterion.
The box size is the value of each box on the chart,for example each box could be ` 1, ` 2 or ` 0.50. The smaller the
box size, the more sensitive would the chart be to price change. The reversal criterion is the number of boxes required
to be retracedto record prices in the next column in the opposite direction.

Support and Resistance Levels

When the index/price goes down from a peak, the peak becomes the resistance level. When the index/price rebounds after
reaching a trough subsequently, the lowest value reached becomes the support level. The price is then expected to move
between these two levels. Whenever the price approaches the resistance level, there is a selling pressure because all
investors who failed to sellat the high would be keen to liquidate, while whenever the price approaches the support level,
there is a buying pressure as all those investors who failed to buy at the lowest price would like to purchase the share. A breach
of these levels indicates a distinct departure from status quo, and an attempt to set newer levels.

Decision Using Data Analysis

Technical analysts have developed rules based on simple statistical analysis of price data. Moving Averages is one of the more
popular methods of data analysis for decision making.
(a) Moving Averages: Moving averages are frequently plotted with prices to make buy and sell decisions. The two types of
moving averages used by chartists are the Arithmetic Moving Average (AMA) and the Exponential Moving Average
(EMA). An n-period AMA, at period t, is nothing but the simple average of the last n period prices.
AMAn,t = 1/n[Pt + Pt-1+ … + Pt-(n-1)]

To identify trend, technical analysts use moving average analysis:

(i) A 200 day’s moving average of daily prices or a 30 week moving of weekly price for identifying a long term trend.
(ii) A 60 day’s moving average of daily price to discern an intermediate term trend.
(iii) A 10 day’s moving average of daily price to detect a short term trend.
For example Moving Average is calculated by considering the most recent observation for which the closing price of a stock on
‘10’ successive trading days are taken into account for the calculation of a 5 -day moving average of daily closing prices.

Trading day Closing prices Sum of 5 most Two-item Moving Average

recent closing Centered Total
price

1 25.00
2 26.00
3 25.50
4 24.50
5 26.00 127.00
6 26.00 128.00 255.00 25.50
7 26.50 128.50 256.50 25.65
8 26.50 129.50 258.00 25.80
9 26.00 131.00 260.50 26.05
10 27.00 132.00 263.00 26.30

(b) Exponential Moving Average: Unlike the AMA, which assigns equal weight of 1/n to each of the n prices used for
computing the average, the Exponential Moving Average (EMA) assigns decreasing weights, with the highest weight
being assigned to the latest price. The weights decrease exponentially, according to a scheme specified by the exponential
smoothing constant, also known as the exponent, a.
EMAt = (Closing Price of the day – EMA of Previous Day) x Exponent + Previous day EMAn = Number of days for
which average is to be calculated.
 Dow Jones theory
i Dow theory based upon two indices DJIA DITA
ii the movements divided into 3 classifications
a
Primary movement main trend lasts from oneyear to 36m on longer
b Shorten in duration than
Secondary movement primary movement and opposite
in direction 2 weeks to a month on money
c Daily Fluctuations Daily movements from day to day

Charles dow proposed that Primary uptrend would have 3 moves

First Accumulation
of shares by Fansighted knowledgeable investors
Second Ammiral of First reports of good earnings by Componations
Third report of financial well being
Widespread
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33330.98 -9.77 11.89222 141.4249 33329.95 4.57 -2.99444 8.966698 -44.6489 -35.6106
33335.08 4.1 25.76222 663.6921 33319.67 -10.28 -17.8444 318.4242 -42.148 -459.713
33301.97 -33.11 -11.4478 131.0516 33302.32 -17.35 -24.9144 620.7295 574.4585 285.215
9 33259.03 -42.94 -21.2778 452.7438 33319.61 17.29 9.725556 94.58643 -742.433 -206.938
10
333642.9 -194.96 2625.401 68.08 6230.768 164.6768 1639.441
9 -21.6622
1
291.7112
17.079
7.564444 692.3076
26.312 1941
covariance 182.1601

2 sq
sd of xy 449.3826
51.44

i iii
r 0.405356
an
m

405

M 405 notheyday
0 for nearest to zero market shows weak
if M 6mm of efficiency

But in above M 905 not nearest to zero

concluded
moderate correlation and Hence
it can he
I there is testfails
show weak form efficiency Gie of
that market does not