Technical Analysis

1. Technical Analysis-An Introduction

Objective of this project.

To understand the concept of Technical Analysis. To Find out the need of technical analysis. To find out various techniques of Technical Analysis How it is applicable to market.

Overview
The methods used to analyze securities and make investment decisions fall into two very broad categories: Fundamental analysis and Technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it 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. Technical analysis just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If any one understand the benefits and limitations of technical analysis, it can give him a new set of tools or skills that will enable you to be a better trader or investor.

History
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Technical Analysis

The principles of technical analysis are derived from hundreds of years of financial market data. Some aspects of technical analysis began to appear in Joseph de la Vega's accounts of the Dutch markets in the 17th century. In Asia, technical analysis is said to be a method developed by Homma Munehisa during early 18th century which evolved into the use of candlestick techniques, and is today a technical analysis charting tool. In the 1920s and 1930s Richard W. Schabacker published several books which continued the work of Charles Dow and William Peter Hamilton in their books Stock Market Theory and Practice and Technical Market Analysis. In 1948 Robert D. Edwards and John Magee published Technical Analysis of Stock Trends which is widely considered to be one of the seminal works of the discipline. It is exclusively concerned with trend analysis and chart patterns and remains in use to the present. It is now in its 9th edition. As is obvious, early technical analysis was almost exclusively the analysis of charts, because the processing power of computers was not available for statistical analysis. Charles Dow reportedly originated a form of point and figure chart analysis. Dow Theory is based on the collected writings of Dow Jones co-founder and editor Charles Dow, and inspired the use and development of modern technical analysis at the end of the 19th century. Other pioneers of analysis techniques include Ralph Nelson Elliott, William Delbert Gann and Richard Wyckoff who developed their respective techniques in the early 20th century. More technical tools and theories have been developed and enhanced in recent decades, with an increasing emphasis on computer-assisted techniques using specially designed computer software.

The Dow Theory and some other basic concepts

As already stated Most of the later developments in technical analysis occurred as a follow up study of the tenets included in the Dow theory. So it becomes important to examine these tenets that are as follows, The Averages Discount Everything:

Technical Analysis

The first of these tenets, the Averages discount everything, is deeply woven into the philosophy of technical analysis. Dows research was based on the Dow Jones Industrial, Transport and Utility Averages. If the phrase market price were to be substituted for averages we are left with the observation market price discounts everything. This premise needs to be fully understood before we can move on. By focusing on price action, technical analysts are simply cutting to the chase, believing that anything that can affect the market price of a financial instrument already reflected in its price because it is the only way in which every kind of player is able to express himself in the stock market. Prices move in Trends: Dow suggested that prices have a tendency to move consistently in the same direction for long lengths of time. These he expressed as Trends. There is a general awareness of what trends are often referred to as being either bullish or bearish trends. What it really refers to is the consistent movement of prices. When markets are moving about aimlessly, they can be said to be random but if there is a certain consistency in the direction of price movements, then they are said to be trended. Trends were classified by way of Direction Up, Down or Sideways or by Time Long, Medium and Short. While the classification by direction was more generic, the classification by time was taken to be more specific. They were given specific names and extent. Hence the long-term was called Primary Trend and was expected to last more than one year. The medium-term was called the Intermediate Trend and was expected last from between 3 weeks and up to 3 months while the shortterm was called the Minor Trend and was expected to last up to 3 weeks. However, under present market conditions, these definitions of trend times have become way off. With the fast technological and trading changes in market long-term trend can be stated as being the same as defined by minor trend in original Dow Theory. Dow defined an Uptrend as a sequence of Higher Tops and Higher bottoms. In other words, prices have to move in such a fashion that every rises will exceed the previous peak while subsequent declines will hold above the previous declines. Pictorially, it will look like this:
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Uptrend

The logic of this is very sound. Unless people are willing to pay a greater premium the prices cannot rise further. And people will pay a higher premium only when they perceive that there are even higher prices down the line. This can happen only when the underlying fundamentals are sound. Hence a sequence of higher tops will indicate that the perception of the underlying set of numbers is deemed to be positive. A higher bottom would form when the people are in a hurry to buy thereby preventing the stock prices to trade down to where they had been earlier. This also suggests that there is a change in the perception about what the stock is worth.

Downtrend The exact reverse happens when the stock is showing a sequence of lower tops and bottoms. People are seen to be in a hurry to discard their holdings. This can only happen when there is something adverse in the perception about the stock. Therefore a clear sequence of lower tops and bottoms would be a bearish signal. This can be pictorially depicted in a Downtrend. Trends have phases: This is a further delineation of how the price trends are to be studied. By giving a greater emphasis on the different aspects of a trend, Dow chose to draw a clearer picture of what is happening within the markets. Essentially, any trend has three phases:

Technical Analysis

Phase of accumulation, where the insiders buy up the stock and begin sponsoring a new rise. Quieter price movements often characterize accumulation but a closer look would reveal that higher tops and bottoms would be recorded at a minor level as insiders begin to absorb all the stocks on offer. The phase of accumulation is then followed by a phase of Rapid Advance. This happens when the broader market becomes aware that there is something new happening in the stock and begins to participate. Maximum price moves occur in this phase. This is then followed by a phase of Distribution. Once the price targets are achieved, the stocks are then sold off to the maximum number of people, thereby exiting the positions built up earlier during accumulation. Many times distribution occurs over a period of time and may be part of the last rise as well as the first fall. On the downside, the sequence begins with distribution, is then followed up with a phase of rapid decline and then terminates with a phase of accumulation. Volume must expand in the direction of the main trend: Addressing the second variable within the market, Dow stated what to most would seem obvious that every directional move in the market must be accompanied by volumes. By making it a rule Dow ensured that we would have a definitive way of checking for true and false up and down moves. One would have to make comparative studies between two legs of advances (or declines) on the volume patterns that they exhibit. Depending upon what is seen, one can then draw a conclusion that either the market is moving ahead with volumes accompanying advances or not. A rising market trend can only persist if there are more and more people willing to invest in that direction. So a rise, which does not have volumes, is suspect and liable for reversal. Averages must confirm: Dow made this as a safety tenet. By stating that the sequence of higher tops and bottoms should be seen in more than one average (industrials as well as rails) he was just ensuring that the uptrend that one is supposing has a stronger foundation. The basis

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of conclusion was that what was evident across a wider canvas has a lesser probability of becoming wrong. Reversal Signals: Dow stated that a trend is in existence until there is an evidence of its reversal. This may seem a bit circular but in reality, it is very clear what Dow is attempting here. He is giving us a clear rule, which prevents us from becoming subjective about the markets. This tenet says to us that until there is a new sequence of lower tops and bottoms, the earlier sequence of higher tops and bottoms should be deemed to be in existence. This way we will be prevented from taking an improper trend consideration.

CRITICISMS OF TECHNICAL ANALYSIS There is no proof that technical analysis works. Actually, there has been some relevant work done by Dr. Andrew Lo at MIT, who has answered the question of the predictive power of some technical analysis concepts. He studied a chart pattern recognized as having a predictive outcome,that of the head and shoulders top formation. Dr. Lo sought to determine if a subsequent price decline was in evidence after this pattern developedcompared to outcomes present without this condition. Once the pattern was defined mathematically and tested over the long-term price history of 350 stocks, it was compared to random walk simulations. The results confirmed that the pattern studied was in fact predictive in nature for a subsequent price decline. Technical analysis works only because traders believe it works and act accordingly, causing the action predicted, for example, traders sell when a stock falls below its 200-day moving average. While this is sometimes true, most active stocks have too much trading activity to cause me to believe in the idea of a self-fulfilling prophecy. If there was a temporary price decline due to the technical selling related to such a break, the stock would rebound if the value became too low relative to its fundamentals. Moreover, the influence of technical analysis is not that great. If you follow the market related channels like CNBC, youll see a drumbeat of fundamental news all day long. Focus on fundamentals is the mainstream approach and the numbers of investors or traders influenced by technical analysis is small in comparison.
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Price changes are random and cant be predicted. This criticism is related to the random walk theory, as the idea that price history is not a reliable indicator of future price direction. Adherents of this view take a different view of the market being efficient. I used this term previously to mean that the market is an effective mechanism over time, to reflect everything that can be known about a stock and its prospects. The efficient market theory holds that prices fluctuate randomly around an intrinsic value. This point is actually similar to the one technical analysts make that a market price reflects everything that can be known about that item. The difference is that one school (random walk) holds that current relevant factors affecting price are discounted immediately, and the other (technical analysis) is that this discounting ebbs and flows, taking place over time intervals that are predictable. Random walk adherents suggest that a buy and hold strategy will offer superior returns, as it is impossible to time the market. More on the possibility that attempting entry and exit on intermediate price swings could increase returns, relative to a buy and hold strategy.

2. Charts
In technical analysis chart is a foundation. Charts are similar to the charts that you see in any business setting. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a one-year period, where each point on the graph represents the closing price for each day the stock is traded. Its a generally said A picture is truly worth a thousand words.

Technical Analysis

Types of charts are as follows:1. Line charts

2. Bar charts 3. Candlesticks charts

1. Line Charts

Line charts is the simplest type of chart. As shown in Figure 1 the chart of IGL the line represents the closing price of the stock on each day.

Figure 1

Dates are displayed along the bottom of the chart and prices are displayed on the side(s). Line charts strength comes from its simplicity. It provides an uncluttered, easy to understand view of a security's price. Line charts are typically displayed using a security's closing prices.

Technical Analysis 2. Bar Charts

A bar chart displays a security's open (if available), high, low, and closing prices. Bar charts are the most popular type of security chart.

Figure 2

As illustrated in the bar chart in Figure 2, the top of each vertical bar represents the highest price that the security traded during the period, and the bottom of the bar represents the lowest price that it traded. A closing "tick" is displayed on the right side of the bar to designate the last price that the security traded. If opening prices are available, they are signified by a tick on the left side of the bar. Bar is red color represent fall in price whereas green color represent rise in price.

3. Candlestick Charts

The same four data points are used (OHLC) but in a slightly different manner. The open and close are plotted and joined together by a vertical box while the high and low are placed as small extensions above and below the box. The width of the box is kept uniform. Depending on whether the open is greater than the close or lesser, the box is suitably colored. If the close is lower, then the box is colored while if the close is higher, the box is white. This kind of charting is more visual as it can tell in a flash where the open and close were in relation to one another. Figure 3 shows the charts of Vardhman Industries gives the example of candlestick chart.

Technical Analysis

Figure 3

Other less frequently used charts Point and Figure, Renko and Three Line Break charts: These are time independent charts where price plots are made when the stock moves a certain number of points or a certain percentage move occurs. Kagi: This is a type of charting where the thickness of the line plotted changes with the crossing of previous highs and lows. Equivolume: A particular type of charting method, which seeks to combine volumes and prices into one bar. The bars are made thin or thick based on the extent of volumes, which are seen on that particular time period. A high volume day will have a thick bar while a low volume day will have a thin bar.

Periodicity
Regardless of the "periodicity" of the data in your charts (i.e., hourly, daily, weekly, monthly, etc), the basic principles of technical analysis endure. One can change the periodicities range of the charts from 5-min to daily or weekly. Typically, the shorter the periodicity, the more difficult it is to predict and profit from changes in prices. The difficulty associated with shorter periodicities is compounded by the fact that you have less time to make your decisions. Figure 4 shows a example of 5 min chart for the period of 5 days.
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Figure 4

However periodicity can be used by trader to make the decision whether to sell or buy for short term, medium term or long term. Intraday trader can follow 5 min charts, short term trader can follow daily chart whereas long term trader can follow weekly chart.

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3. Support and Resistance

At the core of all technical analysis theory are two very simple concepts: support and resistance. Support can be defined as a floor through which the price has trouble falling below. There is no scientific formula for calculating support; it is something that is typically eyeballed by traders, and hence involves somewhat of a subjective element. Resistance, on the other hand, is simply the opposite: it is the upper boundary through which a price has trouble breaking. Like support, resistance levels are somewhat subjective. Generally, if the market touches a certain level a number of times and cannot sustain a break above that level, it can be identified as resistance. See the charts below for an example of identifying support and resistance. The reason why price has trouble breaking these levels is the presence of actual orders around these levels. A support level is simply a price area where buy orders tend to be, and so it takes more than normal selling pressure to break that level. Similarly, a resistance level is a price area where sell order tend to be, and so it takes more than normal buying pressure to break that level.

Figure 5
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The price at which a trade takes place is the price at which a bull and bear agree to do business. It represents the consensus of their expectations. The bulls think prices will move higher and the bears think prices will move lower. Support levels indicate the price where the majority of investors believe that prices will move higher, and resistance levels indicate the price at which a majority of investors feel prices will move lower. In Figure 5 the support and resistance level was between 3100 and 3160. Breaking of support level lead to a further fall In price. This was a break out of support level. All the trader who were holding the stock with a believe that it will rise starts exiting and all the trader who were waiting to short the script as soon as the level breaks all enter into position, due to which the volume of supply increase more then the demand and thus price decreases. Similarly in Figure 6 the support and resistance level was between 550 and 290. When price broke the level of 550, it gained the confidence of trader which result to increase in demand of stock and increase in price. This shows that trader were not sure were the price will lead when the price was ranging between 290 and 550.

Figure 6 One can use support and resistance is to trade outside of the range; in other words, to anticipate a breakout. This involves placing orders to buy above resistance and to sell below support. The rationale is that the market will gain momentum once it breaks out of the range, and thus by placing orders just below/above support/resistance, traders will be able to make big gains when the market moves out of the range. Momentum trading is a bit counter-intuitive, as it involves buying at a higher price and selling at a lower price.
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Support becomes Resistance and vica-versa. When a resistance level is successfully penetrated, that level becomes a support level. Similarly, when a support level is successfully penetrated, that level becomes a resistance level. Following the penetration of a support/resistance level, it is common for traders to question the new price levels. For example, after a breakout above a resistance level, buyers and sellers may both question the level of the new price and may decide to sell. This creates a situation where prices return to a support/resistance level. At this level those trader who did not entered the script at the time of breakout enters now and one who entered at the time of breakout exit from the stock taking his/her profit.Thus creating a small consolidation phase. Figure 6 show the example of Resistance become Support at the price level of 550 after resistance breakout. Support and Resistance do not have to be horizontal lines, and often in a market that is moving higher or lower, trend lines effectively connect the high points or the low points to create a price channel that acts similarly to a horizontal range. Support and resistance levels function in the same manner in a trending market as in a rangebound one. However the line that is following the trend--support in an uptrend or resistance in a downtrend) should be considered by far the stronger of the two. Only when there is a trade with minimal risk involved should you enter a position based only on the resistance line above the price in an uptrend. Example of support and resistance pattern during uptrend can be seen in Figure 7. Price of KRBL is making higher low which creates a support line for the price to sustain. Even though the price of stock is increasing it does not break the resistance line, which is created by every higher high.

Figure 7
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The same trend lines can be drawn in a bear market where the price is continuously moving lower. The downside of Support/Resistance trading Support/Resistance trading generally does not yield substantial gains on a pertrade basis. When the market breaks out of the range, it often will make big moves. As a result, traders using range-bound strategies can suffer overwhelmingly large losses when the market breaks out of the range. Inferences from supports and resistances Support lies beneath the market and shows demand. Resistance lies above the market and shows supply. Prices move constantly from one area of support into an area of resistance. Supports once broken will reverse to resistance and vice versa.

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4. Trend Line

In the preceding section, we saw how support and resistance levels can be penetrated by a change in investor expectations (which results in shifts of the supply/demand lines). This type of a change is often abrupt and "news based." In this section, we'll review "trends." A trend represents a consistent change in prices (i.e., a change in investor expectations). Trends differ from support/resistance levels in that trends represent change, whereas support/resistance levels represent barriers to change. Trend is the basic direction of the market (or security) price movement. Trend can either be upwards, downwards or sideways. Once a trend identified, then trend lines are drawn to define the lower limits of an up trend or the upper limits of a downtrend. At its most basic level, we form trendlines by joining two lows in a rising trend (support trendline) or by joining two highs in a declining trend (resistance trendline). Up Trendline: This is drawn when prices are making higher tops and higher bottoms i.e. in an up trend. A straight line is drawn from the lowest low of the period to the lowest low prior to the highest high so that the line does not pass through prices between these two

Down Trendline: When prices are making lower tops and lower bottoms a straight line is drawn from the highest high of the period to the highest high prior to the lowest low so that the line does not pass through prices between these two points.

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Since prices hardly ever rise or fall at a constant rate. At such times it should be realized that the second point (i.e. the last minor low or the last minor high) is the fixed one and we can move the first point (i.e. the point at the lowest low or the highest high) to a level where all the trading bars lie above or below, (as the case may be), the trendline.

Figure 8 As shown in the figure 8 the stock price of the IGL is making Higher low and Higher high with the support of the trendline. So one can hold the stock till the time trendline is not broken. It is essential that trend lines be drawn correctly as it is the recognition of the trend line and the violation of this trend line that is your key to successful trading by using technical analysis.

Role of Trendlines Trendlines function mainly to define supports (in a rising market) and to define resistance (in a falling market). Stocks in a trend are expected to persist with the same trend until the trendline is penetrated or broken. Depending upon which time frame chart is used to plot prices, the trendlines are labeled as short-term trendline or medium term or long term trendlines. The break of a long-term trendline is to be treated as much more significant development as compared to a break of a short-term trendline.

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Dynamics of a Trend During development of a trend the growth of the trend proceeds at different rates at different times. A frequent sequence is the following - a short initial explosive breakout and advance from a previous prolonged period of trading in a limited price range, a much longer period of steady progression at a lower rate of change and, finally, a shorter period of noticeably slower rate of progression. Each phase of trend advancement is followed by a period of retracement (price falling after creating a top in uptrend and rising after creating a bottom) and consolidation. The initial growth phase is too rapid to be sustained and the ensuing correction is often quite deep. The second phase of advancement is one of steady sustainable growth and often persists for some time. Inevitably this too ends and a period of retracement follows but usually not as deep as the initial correction. This second correction often takes more time than the first to complete the corrective process. When the correction is complete the final phase of trend advancement occurs usually at the slowest rate of change for the whole progression of the trend and then this too corrects.

Figure 9

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As shown in Figure 9 the price of NaharSpinning is rising from May 2009 with the support of the Trendline 1 and reached the high of 150 and started falling back. When it broke the Trendline 2 at 123 one can either exit or can hold the stock with the support of Trendline 1. When the support of Trendline 1was broken at 110 one should surely exit the stock and book the profit. Now if one wants to enter the stock again then one will have to wait until the Trendline 3 resistance level is not broken which is making Lower low. Thus one can use trendline for the longterm investment as well.

Fibonacci Retracement Lines Fibonacci was a thirteenth century customs officer in Pisa. He was a mathematical genius and introduced Arabic numerals to Europe. Of his three major mathematical publications his masterpiece was Liber Abaci - the Book of Calculations. In this opus he solved the conundrum of the mathematical progression, the sequence of progression being the following: 1 + 1 = 2; 1 + 2 = 3; 2 + 3 = 5; 3 + 5 = 8... etc. Levels at which the market is expected to retrace to after a strong trend. The amount of retracement tend to fall into predictable percentage amounts in any given trend be it short or long term. These predictable amounts tend to be Fibonacci fractions of the price distance covered in the last move of the trend. This trend is know as Fibonacci Retracement. Based on mathematical numbers that repeat themselves in all walks of life, Fibonacci retracements attempt to measure the likely points that a stock price will retrace, or pull back to within a range. The key numbers in trading are 38.2%, 50%, and 61.8%. Consider the following example to see how Fibonacci retracements work. Suppose an asset is on an uptrend, going from 0 and 1000. After the asset reaches 1,000, how far will it retrace meaning how far will it fall before resuming its initial uptrend? We can do this by using the Fibonacci retracement numbers to gauge how deep of a pullback we could expect after the top boundary is reached. So, mathematically, it works like this:

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The 38.2% line. Calculate 38.2% of the size of the significant price move. The size of the significant price move in this case is (1,000) minus the lower boundary (0). In this case, the size of the significant price move is 1,000 pips. .382 x 1000 = 382 pips. It is expected that the asset will retrace 382 points from its peak. Assuming the asset is going up from 0 to 1,000, it would retrace 382 pips from 1,000. 1,000 382 = 618. Accordingly, this is a key level to look out for; you may want to buy here (at 618), as it is expected the upward trend will resume after reaching this retracement level. The 50.0% line. Same situation; 50% of the significant price move (1,000 pips) is 500. Take that off from top (1,000) since it is an the upward trend. 1,000 500 = 500. Look for the upward trend to resume at that point. The 61.8% line. 61.8% of the significant price move is 618. 1,000 618 = 382. If the asset retraces to this point, it is viewed as an opportunity to buy. If the asset were trending lower meaning it had gone from 1,000 to 0 then you would use the Fibonacci numbers to calculate the retracement regarding how far the price may rise before resuming the downtrend again. You would calculate the Fibonacci retracements in the same manner, except you would draw from the high point of the significant price move to the low point of the move. Parameters: 38.2%, 50.0%, and 61.8% are the most common Fibonacci Levels. The 38.2% level is considered the least significant of the three major Fibonacci levels. The larger the percentage line (i.e. 61.8%) the greater the likelihood that the price will find support. Please keep in mind that other retracement levels exist in Fibonacci Studies that are not widely watched by the market. These levels include 21.4% and 78.6% as well as 127.2% and 161.8% extensions. Most charting packages do not even reference these levels and most traders would argue that if the market retraces 100% of a previous move, the original trend is no longer valid. Other Fibonacci studies called fans and arcs are quite mathematically complicated and are similarly ignored by most traders. These are very close to the common perception that stocks tend to correct by one third, one half or two thirds of their recent trend. When prices seem to be correcting a significant move one can quickly calculate and identify these possible Fibonacci points of retracement. If prices retrace to one of these levels and find support then this could prove to be a good, low risk area to enter the market or add to your previous stock
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holdings. If correction exceeds the 62-66% it is then very probable that the previous trend has failed and a reversal is truly in effect. How can one trade with the help of Trendline? Trend Lines allows the buyers and sellers to adjust their respective positions with the prices moving to and fro between Trendlines and Channel lines, the exact happenings can be understood by gaining an insight on the prevailing human dynamics associated with Trends. Trading can be done on retracement i.e. when the price just moves away from Channel Line or people who want to be on relatively safer side can trade using the Trendline; when Trendline gets significantly penetrated short sell (sell first buy later when price depreciates) in a down trend or take long position (buy first and sell when price appreciates) in an up trend.

Figure 10 Figure 10 is the same company shown in Figure 9 but now we will analysis with the help of Retracement Line. The price of company even though was in a upward trend from May 2009 it had many up and down, So one would have exited the stock in a medium term and must have re-entered at various level around 74.50(61.80%), 101(50%) and 117.25(23.60%) to make a short term to medium term profit.

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Inferences from Line Studies Line studies help in establish the concepts of supports and resistances on a more dynamic basis and therefore one can follow the price movements as they unfold either up or down. Correctly drawing Trendlines and studying the penetration based on the type (up trend/downtrend) and nature (long, medium, short term) of trend allows us to anticipate price movements. With Help of Retracement Lines we can understand the corrections that will take place and profit from it. Identification of precise points for entry and exit and are established as well as stop loss levels that will help us manage the trade from a risk and reward perspective can be determined with help of Trend channel Lines. Line studies are therefore an invaluable but extremely simple way of looking at markets.

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5. PRICE PATTERNS

After the basic concepts of Support and Resistances and the simple but very much important Line Studies (Trendlines), the next set of tools in the realm of technical analysi is the study of Price patterns. Price patterns are repetitive patterns - or shapes - which appear often enough on price charts - that they have come to be recognized as having some value in trend assessment as well as trend forecasting. Formation of Price Patterns. The basic cause of Price patterns forming is Market Symmetry. Market Symmetry is a state where the push and pull of supply and demand manifest themselves in such an orderly manner that the prices remain within an orderly structure for a long period of time. In the case of the Trend line, this orderliness exhibits itself whenever a certain percentage of climb or fall has occurred from around an invisible mean. There are other ways that the market expresses such symmetry. Many a times, it is found that such expressions of symmetry assume Geometric shapes. These patterns have appeared often enough on different charts of different companies through different times that they have now been validated to their consistency.

Basic Characteristics of Price Patterns They are expressions of market symmetry and hence would be part of the supportresistance mechanisms They appear to be often in geometric or some easily identifiable form.

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Classification of Price Patterns. Patterns are classified into two categories: Reversal Patterns: These are often seen as a Major variety of pattern as they are seen at the end of long moves i.e. they signal end of one trend and start of opposite trend. The following are the most commonly found Reversal patterns: Head Shoulder (and its mirror the Inverted Head and Shoulder) Triple Tops (and its mirror the Triple Bottom) Double Tops (and its mirror the Double Bottom) Rounding Bottoms

Continuation Patterns: Continuation patterns, on the other hand, will only interrupt the trend for a while and the trend is expected to resume once the interruption is over.The following are the most commonly formed continuation patterns: Triangles Flags and Pennants Wedges Gaps

Reversal Patterns As mentioned earlier these signal end of one trend and start of another Trend. a. Head & Shoulders: This is so named because it appears in the shape of a "head", which is bordered on two sides by two "shoulders". Pictorially, it would look like this:
Shoulder Head Shoulder

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Neckline

Since the "head" is joined to the "shoulders" at the Neck (in our body), the line joining the two shoulders and the head is referred to as the Neckline. The pattern is said to be completed (or resolved, as the jargon goes) only when prices penetrate the neckline (or achieve a breakout below the neckline). This pattern was seen in a script Tata Steel. The area circled shows the formation of this pattern.

Figure 11 This is normally observed when up trend is changing over to downtrend.

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Figure 12 The inverted Head and Shoulder is nothing but a mirror image of the picture given above. It is observed when downtrend changes to an up trend. In Figure 12 the area circled shows inverted Head and Shoulder. Uptrend in the above stock started after the neckline was broken.

b. Triple Tops and Double Tops and the respective bottoms These are different varieties of the head and shoulder pattern. In the pattern above, the two shoulders are minor tops, which are below the final top (which is the head). If the two shoulders were to rise to the level of the head, then we would have a pattern, which has three highs around the same level - the Triple top. If there were to be only two drives to the top and the levels are the same, then the pattern would be a Double top. Pictorially, it would seem thus:

Triple Top

Double Top

The Triple and Double bottoms are exact mirror images of the two patterns shown above. The price area between two tops is known as the Valley. The pattern is said to have completed when the prices break below the valley. The following can be noticed: The Head and shoulder pattern is a higher-top and higher bottom formation succeeded by a lower top and lower bottom (once the neckline breaks) The double (or triple) top is similarly a same top followed by a lower bottom (once the valley level breaks). Hence the rules relating to the support-resistance concept as well as the Dow theory discussed earlier, remains consistent. The following charts examples of a head and shoulder double and triple tops as well as bottoms. Figure 13 shows the example of the Double Top formation. Silver future saw a huge fall in price after the valley of double top formation was broken.

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Figure 13 Figure 14 shows the example of Triple Tops.

Figure 14 c. The Rounding Pattern This pattern resembles a large U shaped structure and hence the name "rounding" pattern. It is characterized by a long drawn out, slow development where the prices become less and less volatile, dropping down to an almost quiet level. Slowly, they flatten out and start a slow climb upward. This gradual process takes on a rounded shape and gives the pattern the name. The slow nature of the pattern means that this
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pattern develops over weeks and months and is usually a signal of slow and quiet accumulation. Since this is found at the bottom of bear markets, it is classified as a major reversal pattern. It is suggestive of action by insiders. Every accumulation phase is characterized by the appearance of this pattern. The Rounding top is an exact replica (but reverse) of the same pattern at the top. However, since our markets have not begun witnessing any major distribution as yet, there isn't a single good example of a stock with rounding pattern. The pattern is said to be resolved when the top of the U pattern is exceeded by the prices.

Continuation Patterns
These patterns normally occur whenever the market receives some new informational inputs, the source of which is not immediately known. For example, if there is an up trend in progress in a Indian company and there is some news about a merger internationally between this company and another MNC group which is also present in India, one does not readily know if such a merger would affect the Indian operations and that too in what way. There will of course be no immediate statements from the company circles about the issue and therefore the market, at such times, chooses to halt and consolidate. The word consolidate means strengthen ones position while holding the ground. Hence continuation patterns are often of the consolidation variety. When markets undergo a period of consolidation, they naturally stop gaining new territory. Since further moves in the same direction are halted, the market (or the stock) begins to retrace the same ground that it had covered earlier. Since the fresh information is being digested and no clear views have yet formed, the prices tend to move back and forth rapidly within a narrow confine. Some times these moves remain quite clearly divided between two fixed levels a high price where there are enough convinced that the news is bearish for the market or the stock and a low price where the opposing view is held. The prices oscillate between these two areas several times and thus, a zone of consolidation is formed. This keeps the market in fixed zone. Some Of the Continuation patterns are:
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a. Triangles: There will be occasions when the consolidation patterns can be boundaried by converging trendlines. These would then look like a cone and hence the geometric shape is the name given to the pattern a Triangle. There is a degree of uncertainty associated with the triangle pattern. When the prices can be confined between converging trendlines, one finds that the tops are getting lower while the bottoms are getting higher. Pictorially it can be seen to be like this: The pattern shown above has rising bottoms and falling tops. According to Dow theory; higher bottoms are a sign of strength while lower tops are a sign of weakness. So, here we have a situation, where the market is showing both. This situation arises when the confusion is extreme and people are moving back and forth between pessimism and optimism.

Figure 15 In Figure 15 after hesitating for a while after a decline, the prices reversed the trend continued the sharp rise in price. The ideal triangle is called a symmetrical triangle. When the triangle is formed such that there is either a fixed band of accumulation or a fixed band of distribution so that one of the lines of the triangle pattern is horizontal, it forms what is known as a right angle triangle. It also goes under

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the names of ascending or rising or descending or falling triangles. Pictorially, they would look like this:

Descending Triangle

Ascending Triangle

These form when there is one or two large buyers (in descending triangle) or sellers (in ascending triangle) at a fixed price for some reasons particular to them. However, the market as a whole reacts differently and therefore the participants come in at lower and lower highs (descending triangle) or higher and higher bottoms (ascending variety). Once the main buyer or seller is exhausted of his quantity, the stock breaks out in the main direction and proceeds ahead.

Figure 16 Figure 16 represents the example of the descending triangle .

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Another one of triangle pattern is the Expanding Triangle. Two divergent lines from a common focus point characterize the expanding triangle. It is the reverse of the normal triangle and it also goes by the name of reverse triangle sometimes. Pictorially it would look like this: It is a pattern with higher tops and lower bottoms. This signifies confusion in the market. It is only seen at market tops as the pattern keeps enlarging as it progresses (market bottoms are quiet affairs and prices contract). This is normally seen during rumors about company or clear news is not reaching the market participants. After 3-4 forays to the top boundary of the pattern, the stock prices reverse with a massive sell off. b. Wedges Wedges are slightly rarer patterns that come at the end of long moves. They are triangular patterns which symmetrical triangles which are completely sloped upward or downward. They are also thinner patterns and the rising or falling line would be characterized by a sharp angle. Pictorially, they would look like this:

Rising wedge

Falling wedge

Finding good examples of this pattern is difficult. Figure 17 represent example of falling wedge.

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Figure 17

c. Gaps Price gaps occur when there is some extra emotion generated about a stock overnight or intra day, which rush to buy or sell at certain price levels, which are beyond the price levels last seen. Traders are in such a hurry to execute that they willingly let go of several points from the last close. This creates a pocket of price area where no trading occurs. For example, if a stock closes at 360 today and there is some fresh development overnight, which makes everyone bullish, and then there will be a rush of buy orders tomorrow. But there may be no sellers at 360 and the bunched up buy orders will prevent any trade below this level. A seller may emerge only around say, 365 and the first trade will take place there. This will leave an untraded price area between 360 and 365 that will appear as a gap on the price charts. As explained above gaps occur when some sudden new development occurs which is deemed to affect the trend either positively or negatively. The appearance of a gap on the charts is therefore a sign of warning of a possible change in the trend status. It will either accelerate or reverse.

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Gaps are classified as follows: Normal gap: These are gaps caused by non-emotional factors such as dividends and other benefits that companies dole out. They have no significance. Breakaway gap: This is gapped move past a zone of congestion or a price pattern, which leads to the end of that phase of the trend. The gap will start a new trend in the direction of the trend. Run-away gap: This leads to strengthening of the trend that is launched by the earlier gap and therefore this would be the second gap in the sequence. Sometimes there are more than one run away gaps when the trend strength is very high. Exhaustion gap: This is the last gap in the sequence and ends the rapid acceleration in the trend. Many times it is difficult to find the exhaustion gap on the charts as the prices form the gap and reverse the same day. So the only way to spot is to check the previous high and the current open and this is where the gap will be. The reversal will carry the prices below the opening gap up and therefore the price bar may look like a normal one. It requires some training to be able to catch the exhaustion gap.

Figure 18 In the chart above a few break away or common gaps are shown. Note the marking EG signifying an exhaustion gap. Note that the prices open above the previous day high and
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then moved slightly higher before selling emerged to close the gap the same day. There are no run away gaps in this chart example. If there were more than one gap in succession, the second one would be called the run away gap. Gaps are generally seen around price patterns and most of these show a resolution with an upside or downside gap. Gaps act as future support (during reactions in an up trend) and resistance (during rallies in downtrends). If the gap area is wide, then the mid point of the gap too acts as a support or resistance. A gap that is immediately closed i.e. prices trade back into the gap area loses its trend signaling significance.

d. Flags and Pennants These are small rectangles (flags) or triangles (pennants) that form on daily charts (mostly) and weekly charts (occasionally). They are part of a fast moving market and therefore signify as the larger patterns convey a temporary halt in the trend that will be resumed. The flag or pennant is seen only in the fast paced area of the trend. Therefore, the formation of a short term rectangle or triangle, has to be preceded by a rapid, almost vertical rise which is called the flag of the pole and following this rapid rise, the prices consolidate for a few days in a narrow range.

Figure 19
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If the consolidation occurs in the form of a rectangle, then it is known as a flag, if in the form of a triangle, then it is known as a pennant.

Figure 20 Volume patterns within flags and pennant remains the same as in triangles. They should be high during the formation of the pole of the flag and then dry off while the flag is being formed. Usually, the number of days taken to form the flag or pennant consolidation should not take more than twice the time taken to form the pole. If it extends beyond that, the pattern is more likely to fail.

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6. Candlesticks
The traditional charting patterns so far have used the normal high-low bar or a close only type (line) chart. Japanese Candlestick charting, adds an exciting dimension to Technical Analysis, and candle pattern analysis using the basic data of Open, High, Close and Low and also gives insight into the recent trading psychology. Japanese Candlesticks offers a clear picture of the psychology of short-term trading. Since it does this by using the same data points, it has, become the most popular way of looking at stocks. Most traders as well as market advisors use this form of stock charting as it is visually more appealing and is able to convey at the very first impression, seemingly, more information than the other forms of charting. Candlestick charting was originally used by rice traders in Japan back in the 11th century and therefore can be said to be the earliest form of technical analysis. It was brought to the notice of the Western world through the efforts of Steve Nison who has authored two very successful books on the subject entitled, Japanese Candle Stick Charting and Beyond Candlesticks. The popularity of this form of charting proved to be so high that today we have several more books on the subject by different authors and a number of softwares available. Drawing the Candlestick Charts As stated earlier, the candlestick chart uses the same data points as the other charts i.e. the Open, High, Low and Close. A traditional Japanese chart consists of a real body, representing the open and close, and upper and lower shadows, representing the high and low of the day. Pictorially, it would look as follows:

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It can be seen in the picture above that two candles are shown, both with different colors. They have all the four data points O, H, L, and C featured on the chart. The major difference is in the fact that the area between the open and the close has been broadened a bit which makes the picture resemble that of a Candle. The small vertical line above the mid thick portion which is the body is the "shadow" or the wick of the candle. Since the entire picture looks like a candle, this form of charting also came to be known as "candlestick" charts. It is seen in the picture above that there are two colored candles shown. The one to the left is shown in green and if one observes closely, it will be found that the Open is shown to be lower than the close. Exactly vice versa is the case in the example on the right. Here the close is shown to be higher than the open. This is the major differentiating factor between the candles of different colors and that is what gives them a greater visual impressionability. It is to be noted that the body of the candle is what is colored and not the shadows. By color- coding the body, an immediate idea of the close vis--vis the open is understood by the analyst. The importance of the open and the close The candlestick pattern lays much emphasis on differentiating between the open and the close and largely, disregards the importance of the highs and lows since these two are the most important valuation areas of the price for the day. The open is the sum total of all the facts/news known up to that moment and the view formed on these. Then the market trades during the day to establish the high and low for the day. Finally, the overnight news and views along with the input from the days trading
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pattern get distilled to form the view near the close. Hence, maximum valuation goes into computation of the open and close. If the open is higher than the close, then it would mean that the days trading pattern was such that people ended the day more bearish than where they began. Likewise, if the close is higher than the open, it would mean that the view at the close was more bullish than when the market began. This has a bearing on the market for the next day and by color- coding the candle body a different color for bullish and bearish set ups the candlestick gives a more immediate make of the market. Even though the colors are shown to be green and red, the general convention has been to show the bearish candle (i.e. close below open) as black and the bullish candle (i.e. close above open) as white. Hence, by common usage, you have the black candle referring to bearish close and white candle referring to bullish close. The body size The next consideration in the candlestick chart part is the size of the body. Since the body is made up of the distance between the open and the close, it is natural to note that its length will depend upon how far away from the open the market or the stock closed. If the open and close were wide apart we would have a very long bodied candle while if the close came back to near or at where the market opened, we would have a very small bodied candle. In common usage, one would also be frequently hearing of "long" and "small" bodied candles and these are then combined with the color of the body and are called "long white" or "long black". One usually does not refer to the color of the small body candle. The reasons for the same will become clear as the discussion on candlesticks unfolds. It should be clear that when the close ends a good distance away from the open, the stock has had some clear directional movement. To put it in a different way, after the market opens, if the stock begins moving away from the opening price in one direction and closes far away from it, some particular reasoning must have prevailed in the market on that day top ensure such a movement. Directional movement in prices can only occur when there is a conviction about the direction. Hence, a long body candle represents the predominance of a view, depending upon the color; the view would be
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either bullish or bearish. Sentiment wise, long body represents decisive action by market participants. In exactly a similar way, the small-bodied candle represents the opposite of the above that is, the close of the day ends quite near the open. This would mean that the stock, after opening at a price, went up and down to establish the high and low of the day (i.e. the range for the day) and then decided to move back to near where it opened. Such a movement depicts the non-directionality of the price move. Looked at from the mental perspective, it suggests that the players are unsure of the days movements and the news and therefore returned to the valuation that they placed on the stock near the open. Therefore, small body represents indecision by market participants. Since indecision prevails, it matters only marginally whether the candle is black or white. There are some situations where the market will close at the level of the open. In such a case, there is no body and a horizontal line depicting the open and the close - just like in the normal hi-low chart- represents the candlestick. This special condition will be dealt with under patterns of candlesticks in the preceding sections.

Candlestick Patterns The interplay of the body size and the shadows as well as the open and close of one or more candles is what produces the candlestick patterns. At the outset, it should be understood that almost all the candle patterns are "reversal patterns". A black candle (bearish) following a white candle (bullish) would "reverse" the earlier bullishness. A small body candle (indecision) would reverse the implications of a long bodied candle (decisiveness) etc. A few candle patterns are continuation patterns.Most of the patterns are single candle patterns, few two-candle patterns and three candle patterns exist and anymore-multicandle patterns are rarity. Reversal patterns, since they are seen so frequently, need to be confirmed. In other words, the market or stock should follow through in the direction of the indicated reversal else; it is to be deemed to have failed. All single and two candle reversal

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patterns need to be confirmed. Three candle patterns and higher do not need confirmation as the multiple candles in themselves are taken as confirmations. Reversal patterns must have something to reverse.Meaning thereby, that some directional movement must precede any pattern that seeks to reverse. The extent of reversal would depend upon the extent of the move - either up or down - which preceded the appearance of the pattern. It naturally follows from the above that any reversal pattern seen in a sideways phase is value less as there is nothing to reverse. Pattern failures are seen very frequently. A lack of confirmation has to be taken as a pattern failure. One must then look for a reversal of the signal shown by the earlier pattern. This is a subtler signal used by the experienced users of candlestick charts. Pattern Examples Single Candle Patterns: These patterns are formed by the lengths of the body to the shadow.

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Two Candle Patterns HAMMER It is a bottoming candlestick line where a small real body at the top of the trading range with a very long shadows with little or no upper shadow.

HANGING MAN It is topping pattern where a small real body with little or no upper shadow but a long lower shadow. It is a bearish reversal pattern when appearing during an up trend.

SHOOTING STAR It is a bearish candlestick with a long upper shadow with little, or no lower shadow, and a small real body near the lows of the session. It is bearish when seen at the end of an advance.

DOJI A candle with no body as open and close is at the same level. It indicates high levels of indecision and is bearish if seen at the end of long up moves and bullish if seen at the end of long down moves. There are some varieties of Doji such as Long Legged -very long shadows, Gravestone - open and close at the low of the day and Dragonfly open and close at the high of the day. All have the same implication. The relation between two adjacent candles forms these patterns. The second candle is the one that completes the pattern. Because two candles are involved, they are slightly more reliable patterns than the single candle variety. Nevertheless, they too require confirmation. In all two-candle patterns, the second candle will be the opposite color of the first candle.

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DARK CLOUD COVER In an up trend, a long white candlestick is followed by a long black candlestick that opens above the prior white candlestick's high and then reverses to close around the low of the day. The second candlestick must close well into the first candlestick's real bodybeyond half of the prior candle's real body. This forms the Dark Cloud Cover (pattern on the left) and it is a bearish pattern. Exactly the opposite situation is the case at the bottom. At the low, it is called Piercing Line. ENGULFING PATTERN An engulfing pattern occurs when the price movement for the day completely moves beyond the previous day's candle. Depending on the position, it is called either a bullish engulfing pattern (at the bottom) or a bearish engulfing pattern (at the top). In this pattern, the stock opens below (above) the previous candle and then proceeds past the previous day's high (low) and closes near the high (low). Thus it completely "engulfs" the previous candle. HARAMI It is a two-candlestick pattern in which a small real body holds within the prior session's unusually large real body. The harami implies that the preceding trend is getting ready to conclude. The color of the small body candle is not really important in this case. In Japanese the word harami means "pregnant with". A variety of this pattern is a Doji in the place of the small body candle. It is then known as a Harami Cross (picture on right). The implication remains the same.

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PIERCING LINE

A long black candlestick is followed by a gap lower during the next session. This session finishes as a bullish white real body that closes more than halfway into the previous sessions real body. A green candlestick which closes in the prior red's real body, but still below the middle of the prior sessions real body. One of the varieties of this pattern is the Thrusting Line pattern (shown on the right) where in the candle body marginally penetrates into the previous candle (i.e. less than halfway). There are a couple of more varieties of these called In Neck Line and On neck line where the extent of penetration is up to the low of the previous candle or the body of the previous candle only.

Three Candle Patterns

These are patterns formed of three or more candlesticks. Since one has to wait for the completion of the pattern across a minimum of three trading sessions, usually, these patterns do not require a confirmation by price action. However, it is always prudent to seek confirmation from the market for all candle patterns.

STAR PATTERNS
The Star patterns are the most common and among the most effective patterns in candlestick. They consist of a three-candle pattern. 43

Technical Analysis The middle candle is flanked by two long Morning Star bodied candle of opposing colors.

Evening Star

It does not matter what color the middle candle but it must meet two criteria. One it should be small body candle. Two it should Morning Star Doji leave a gap with the first candle. A gap with the third candle is not necessary but would show strength of the next move if present. The third candle must penetrate significantly into the body of the first candle and should be of the opposing color as the first one. The greater the penetration, the better the pattern. The three together are knows as the Star. Depending upon its position in the trend, it is either known as a Morning Star (at the bottom) or Evening Star (at the top). A variant of this is when the middle candle is a Doji pattern instead of a small body. In such it is called a Morning Doji Star or an Evening Doji Star. These patterns show an even greater reversal at hand. ADVANCE BLOCK It is a three-candlestick pattern in which the last two candlesticks show strengthening upside or downside drive but the third candle is a small bodied one which wearily halts the move. Usually referred to for the upside but no reason why one cannot also refer to it on the downside. Evening Doji Star

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3 SOLDIERS & CROWS These are patterns made up of three relatively long consecutive bearish (Crows) or bullish (soldiers) candlesticks that close near or 3 falling crows on their lows (crows) or highs (soldiers). Each candle will open around the previous close and in almost all the cases; there will be no body gap. While the patterns may appear to suggest reversal, it is more often seen when a new move has been set off. That is, the onset of such a pattern warns of more moves to come in the same direction. If 3 white soldier patterns are seen then the next reaction is to be bought, as the stock is likely to progress into another up trend after a correction. Vice versa for the 3 crows pattern. No confirmation necessary for this pattern. 3 White Soldiers

Multiple Candle Patterns

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Falling 3 (bullish)

RISING OR FALLING THREE These patterns are comprised of five candlesticks; a long real body candlestick preceded three small bearish real bodies, which hold within the first session's - which is also a long body candle -range. So there are two long body candles interspersed by three small body candles. The direction of the small body candle decides the pattern. The subsequent move is opposite to the direction of the small body candles. The final candle must be long and should close in the opposite direction to the small body candles. The color of the small candles is not important

Rising 3 (bearish)

Figure 21 Figure 21 represent bearish and bullish engulfing patterns. Candlestick charting proves to be an excellent visual method to study the market and also applying the candle patterns as per their rules would give one a decent handle on the trend. Some simple observations that can be made to help with the pattern and trend identification are as follows:

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A reversal pattern must have something to reverse. Hence all patterns are valid only if preceded by a decent move. Patterns appearing, in a sideways congestion are next to useless. Multi candle patterns are much more significant than single candle patterns. A failed pattern will lead to a move with greater strength on the other side. No targets are possible using candle patterns. Any expected trend move must show candles of that color when the move commences. In other words, if a decline is expected, then there should be more bearish candles than bullish ones. Trended moves will usually have several long bodied candles pertaining to that direction. In other words, if an up move is on, there will be several long bodied bullish candles in that move. Breakouts from traditional patterns (like triangles, head and shoulder etc) if seen with long bodied candles, would be a strong confirmation of a new trend. Fresh trends often commence with a long body candle. A small-bodied candle at the end of a long trend is a warning of a trend change in the offing.

7. Moving Averages
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Technical Analysis

After understanding trends and trendlines another important tool in Technical analysis is Moving Average. This is similar in principle and application to trendlines but has a curvilinear nature and bends and twists with the prices rather than following a straight unbending path and hence also called as Curved Trendline. Moving averages are one of the oldest and most popular technical analysis tools. This chapter describes the basic calculation and interpretation of moving averages. A moving average is the average price of a security at a given time. When calculating a moving average, you specify the time span to calculate the average price (e.g., 25 days). A "simple" moving average is calculated by adding the security's prices for the most recent "n" time periods and then dividing by "n." For example, adding the closing prices of a security for most recent 25 days and then dividing by 25. The result is the security's average price over the last 25 days. This calculation is done for each period in the chart. Note that a moving average cannot be calculated until you have "n" time periods of data. For example, you cannot display a 25-day moving average until the 25th day in a chart. The constant fluctuation of Prices makes it difficult to understand all the patterns on charts while trading and in this situation moving average becomes very useful. A moving average (MA) is a calculated effort to eliminate or minimize the fluctuations of the numerical value of the phenomenon being observed so that an underlying trend may be recognized when a sequential series of that phenomenon is reviewed. Moving averages of stock prices are usually calculated using the closing price. The moving Average eliminates the fluctuation of price in all time periods below the number that is chosen for the average. This smoothing effect of price change increases as you use longer and longer periods as the average. There are four commonly used moving averages: - simple, smoothed, weighted and exponential. Simple moving averages give equal weighting to each day's price of the number of days chosen for the study. The other three types of averages have been developed to incorporate recent price changes of stocks and give them more importance than historical prices. These three averages are statistically derived by use of complex
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formulas, but overall the simple moving average is the most widely used tool and reliable of the other three.

Simple Moving Average This is the most widely used and is simply calculated by adding up a set of values and dividing the total by the number in the set. This is the average. The closing price of each day for the requisite period (i.e. 5 day, 20 day etc) is taken and average is calculated, for the next day; the closing price of first day is subtracted while the particular days closing price is added and average is calculated. This arithmetic is repeated with each new day. Since each new day prices are considered for calculation it is known as Moving Average.

Figure 22

The chart in figure 22 denotes a 10 days, 50 days and 200 days simple moving average. In a Moving Average chart stock price strength is associated with a rising moving average and that weakness is denoted by a declining moving average. Peaks and troughs occur in the moving average after the peaks and troughs of actual stock prices. This lag occurs because the average is calculated and plotted at the end of the time period chosen
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when in actuality the average occurred at the half way point (i.e. on the 10th day of a 20 day M.A.). Therefore, in graphically representing moving averages they are not plotted after the time of study but at its midpoint, i.e. the moving average should be centered. However, custom and tradition still plot the average to the latest addition of data. Any number of time periods can be calculated, i.e. any numerical number, e.g. 5, 10, 20, etc. for any constant time span, e.g. days, weeks, months, years. However, the shorter the time period calculated the more volatile the average and the shorter the lag period but the more frequent will be costly whipsaws. Longer time periods will be less volatile with fewer whipsaws but the lag period will be greatly increased substantially eroding profits. Choosing An Appropriate Time Span For Your Moving Average Any time span can be considered from minutes to years. An appropriate choice relevant to one's requirements is mandatory. Different markets, different market cycles and different investor goals will determine the most appropriate time period for which to calculate the moving average. Experience has shown most helpful studies include:

Major primary trend monitored by a 40 week (200 day) moving average. Intermediate term trend by a 50 day moving average. Short-term trend by a 20 day moving average.

Multiple Moving Averages. By using two or even three moving averages the fluctuations of the data under study are smoothed twice or thrice thereby minimizing misleading whipsaws yet indicating trend reversal shortly after having taken place. The trend reversal signal is given when the short term moving average crosses over the longer term moving average, both averages having already at least flattened out or better yet reversed direction.

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Figure 23 Figure 23 show that when the MV20(20 days moving avg) cross MV50 from above the stock loses the strength and it start falling. Even though the price touched 1300 level but failed to cross MV200, this show that one should buy this stock only when it break 200 moving averages. Inferences from Moving Averages 1. The moving average is a smoothed trend and as such often acts as an area of support or resistance. Retracements of stock prices often reverse when they reach the moving average level, i.e. in a rising trend a falling stock price often finds support and in a falling market rising stock prices often find resistance when they reach the level of the moving average. 2. The penetration or cross over of a moving average (and therefore of a smoothed line of support or resistance) by the stock price is frequently the signal of a major trend reversal. 3. If the moving average has flattened out or has already reversed direction then its violation increases the likelihood of a reversal of the recent trend. 4. The longer the time span used to calculate the moving average the greater the significance of its violation by price, i.e. A forty week moving average violation by price is of more significance than that of a four week moving average which is of more significance than that of a four day moving average. In the chart
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below note that the long-term average is quite a distance away from the price action while the short-term average hugs the prices rather closely.
5. Traders should look at candlestick patterns and other indicators to see what is

really going on in the market at the time. In the chart when Bullish Engulfing pattern that occurs with the pair bounces off the 20 day EMA. Hitting the 20 day EMA, in conjunction with the candlestick pattern, suggests a bullish trend. Traders should enter once the Bullish Engulfing candle is cleared.

8. Oscillators
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As markets and securities, and fluctuates, prices tend to over compensate, either by moving too high or too low. Oscillators are derived from these price movements. They are particularly handy in determining trading ranges or trend reversals. Thus Oscillator is an indicator that determines when a market is in an overbought or oversold condition. When the oscillator reaches an upper extreme, the market is overbought. When the oscillator line reaches a lower extreme, the market is oversold. Oscillators have been around since the early sixties but gathered popularity with the advent of the calculator and then the computer. The seventies saw a quantum jump in the usage and the work done in this field and most of the advancement in recent times has been in the area of oscillators. Their popularity has grown very much and since they are mathematically derived, many research houses have come up with an oscillator of their own, so their numbers have increased over the period. Few of the oscillators and indicators that are popular would be discussed in following pages. One of the concepts to understand before moving on to looking at various indicators is the concept of convergence and divergence, when the price and the momentum are moving in same direction they are said to be in gear or converging, this does not indicate anything but just that trend is healthy. When the price and momentum are in conflict then at such times it is known as divergence, when this occurs the chances of trend reversing are high. The indicators and oscillators to be discussed in brief are: MACD-Moving Average Convergence Divergence. Relative Strength Index (RSI) Stochastic

MACD-Moving Average Convergence Divergence

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MACD is a useful indicator for spotting major changes in trend. MACD is a trend following momentum indicator used to signal trend changes and to indicate trend direction wherein Crossovers and divergence from price generate signals. The MACD method, developed by Gerald Appel, is a trending indicator, telling us whether a stock is in an up trend or a downtrend. The direction of the long-term trend is the first assessment made of any market. If it is trending up, one should long (buying). If it is trending down, one should be short (selling). The simplest version of this indicator is composed of two lines: the MACD line, which is the difference between two exponential moving averages (EMAs) and a signal line, which is an EMA of the MACD line itself. The signal or trigger line is plotted on top of the MACD to show buy/sell opportunities. Gerald Appel's MACD method uses a 26day and 12-day EMA, based on the daily close, and a 9-day EMA for the signal line. Interpretation The MACD proves most effective in trending markets rather than choppy, sideways markets. There are two main sets of signals generated by the MACD: crossovers and divergences. Crossovers There are two main MACD crossover signals: 1. Signal Line Crossovers: MACD crosses above or below the signal line 2. Zero Line Crossovers: MACD crosses above or below the zero line. Signal Line Crossovers The basic MACD trading rule is to buy when the MACD rises above its signal line. Similarly, a sell signal occurs when the MACD crosses below its signal line. The

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Figure 24 crossing of the MACD line above the signal line can denote the beginning of a trend. An up trend typically pauses or stops when the MACD line crosses and falls below the signal line. The location relative to the zero line is also important in indicating how strong a trend might be. A crossover above the zero line is considered more bullish than one below the zero line. The higher above the zero line it crosses, the stronger the up trend. If the crossover occurs below the zero line, the up trend is likely not very strong.When the bullish crossover occurs above the zero line, the up trend gains more momentum, and the price rises with more intensity.Bullish MACD crossovers are probably the most common signals and as such can be less reliable. If not used in conjunction with other technical analysis tools, these crossovers can lead to whipsaws and many false signals. One way to try and counteract false signals is to apply a price filter to the crossover to see if a trend will hold. An example of a price filter would be to buy if the MACD breaks above the signal line and remains above for three days. The buy signal would then commence at the end of the third day. Zero Line Crossovers The zero line can also be used to produce a signal. It is popular to buy/sell when the MACD crosses above/below the zero line. A bullish zero line crossovers occur
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when MACD moves above the zero line and into positive territory. This is a clear indication that momentum has changed from negative to positive, or from bearish to bullish. After a positive divergence and bullish MACD crossover, the zero line crossovers can act as a confirmation signal. Divergence MACD can provide forewarning of important market turns through divergence. When the MACD trend diverges from the price trend, it can provide a signal that a trending market may slow or reverse. A negative, or bearish, divergence occurs when the MACD is making new lows while prices fail to reach new lows. A positive, or 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 high/low levels. A positive divergence is shown when MACD begins to advance and the market is still in a downtrend and makes a new low. MACD can either form as a series of higher lows or a second low that is higher than the previous low. Positive divergences are not very common, but are usually reliable and can lead to good moves.

Figure 25 In Figure 25 u can see that the price is making higher low and higher high, whereas the average line in MACD indicators are making lower low and lower high. As soon as the trend of average line is crossed the price of the stocks starts falling.
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Weaknesses of MACD MACD is a trend following indicator, and as such, sacrifices early signals in exchange for keeping you in line with the trend. When a significant trend develops, MACD is often able to capture the majority of the move. When the trend is short lived, however, MACD often proves unreliable. This is because moving averages themselves are lagging indicators. Even though MACD represents the difference between two moving averages, there is still some lag in the indicator itself. This is more likely to be the case with weekly charts than daily charts. One solution to this problem is the use of the MACD-Histogram

The Relative Strength Index (RSI)

RSI can provide an early warning of an opportunity to buy or sell. The RSI is a momentum indicator, or oscillator, that measures the relative internal strength of a market (not against another market or index). As with all oscillators, RSI can provide early warning signals but should be used in conjunction with other indicators. Divergences are the most important signal provided by RSI. The Relative Strength Index (RSI) is an oscillator developed by Welles Wilder. Jr. RSI measures the relative changes between higher and lower closing prices, and provides an indication of overbought and oversold conditions. The term "Relative Strength" is slightly misleading and often causes some confusion. Relative strength generally means a comparison between two different markets or indices. RSI, on the other hand, looks at the internal strength of a single market.

Interpretation RSI is plotted on a vertical scale of 0 to 100. The 70% and 30% levels are used as warning signals. An RSI above 70% is considered overbought and below 30% is considered oversold. The 80% and 20% levels are preferred sometimes. The
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significance depends upon the time frame being considered. An overbought reading in a 9-day RSI is not nearly as significant as an RSI for a 12-month period. An overbought or oversold condition merely indicates that there is a high probability of a counter reaction. It is an indication that there may be an opportunity to buy or sell, but does not provide the final signal. RSI signals should always be used in conjunction with trend-reversal signals offered by the price itself. RSI can be plotted for any time span. Wilder originally recommended using a 14-day RSI. Since then, the 9, 10 and 25-day RSIs have also become popular. The shorter the time period, the more sensitive the oscillator becomes. If the user is trading short-term moves, the time period can be shortened. Lengthening the time period makes the oscillator smoother and narrower in amplitude. In using RSI, a crossover above the 70% level is a warning signal to prepare to sell and, conversely, when the RSI falls below 30% you have a notice to prepare to buy. The actual buy and sell signals are given when the RSI reverses (see below). Signals Tops & Bottoms, Failure Swings, Divergence Traders watch for double tops or what Wilder referred to as "failure swings." If the RSI makes a double top formation, with the first top above 70% and the second top below the first, you get a sell signal when the RSI falls below the level of the dip. Conversely, a double bottom at or below 30% (with the first low below 30% and the second at or above the same level) gives you a buy signal when the RSI breaks above the previous peak. These failure swings can lead to divergences between the price action and the RSI. For example, a divergence occurs when a market makes a new high or low, but the RSI fails to set a matching new high or low. A divergence can be an indication of an impending reversal. In Wilder's opinion, divergences are the most important signal provided by RSI.

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Figure 26 In Figure 26 u can see that price move with the crossing of 9 days avg with 14 days avg.

Trendlines RSI trendlines can provide good signals, particularly when used in conjunction with price patterns. When both price and RSI trendlines are violated within a short period you could have an important buy or sell signal.

Stochastic
The stochastic indicator can help determine when a market is overbought or oversold. The stochastic indicator is a momentum oscillator that can warn of strength or weakness in the market, often well ahead of the final turning point based on the assumption that when a stock is rising it tends to close near the high and when a stock is falling it tends to close near its lows.

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The original stochastic oscillator, developed by Dr. George Lane, is plotted as two lines called %K, a fast line and %D, a slow line. %K line is more sensitive than %D %D line is a moving average of %K. %D line triggers the trading signals.

Although this sounds complex, it is similar to the plotting of moving averages. Think of %K as a fast moving average and %D as a slow moving average. The lines are plotted on a 1 to 100-scale. "Trigger" lines are normally drawn on stochastic charts at the 80% and 20% levels. A signal is generated when these lines are crossed. The zones above and below these two lines can be referred to as the stochastic bands. Slow Stochastics The original stochastic is sometimes referred to as the "fast" stochastic to differentiate it from the "slow" stochastic. Some traders feel the fast stochastic %K line is too sensitive and, to improve their analysis, they replace the original %D line with a new slow %K line. The new slow %D line formula is then calculated from the new %K line. The result is a pair of smoothed oscillators that some traders believe provide more accurate signals.

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Interpretation The 80% value is used as an overbought warning signal, and the 20% is used as an oversold warning signal. The signals are most reliable if you wait until the %K and %D lines turn upward below 5% before buying, and the lines turn downward above 95% before selling. An overbought or oversold level indicates that a market may be vulnerable to a retracement these signals are particularly important with monthly charts. Buying into a market with an overbought %K or selling into one that is oversold may involve aboveaverage risk, particularly if the market is pressing against previous levels of support or resistance.

Signals The Stochastic Oscillator generates signals in three main ways: Extreme values when the 20% and 80% trigger lines are crossed. Buy when the stochastic falls below 20% and then rises above that level. Sell when the stochastic rises above 80% and then falls below that level. The pattern of the stochastic is also important; when it stays below 40-50% for a period and then swings above, the market is shifting from overbought and offering a buy signal. And vice versa when it stays above 50-60% for a period of time. Crossovers between the %D and %K lines. Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. Beware of short-term crossovers. The preferred crossover is when the %K line intersects after the peak of the %D line (right-hand crossover). Crossovers often provide choppy signals that need to be filtered through the use of other indicators. Divergences between the stochastic and the underlying price i.e., if prices are making a series of new highs and the stochastic is trending lower, you may have a warning signal of weakness in the market.

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Inferences from Using Indicators Indicators filter price action with formulas. As such, they are derivatives and not direct reflections of the price action. This should be taken into consideration when applying analysis. Any analysis of an indicator should be taken with the price action in mind. When choosing an indicator to use for analysis, choice has to be made carefully and moderately. One should not cover more than five indicators, two to three indicators are enough for good analysis. Indicators that complement each other, instead of those that move in unison and generate the same signals should be chosen.

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9. Conclusion
Technical Analysis allows an investor to study the market in the forms of trends and their effects on market and thus aids him in making decision about when and at what price to enter a market and at what price to get out of it. So one can easily say that it allows an investor to understand the Pulse of market in terms of Prices, volumes and the Speed with which the changes are occurring. The various tools of this field when applied together can produce profitable results. Since the advent of Retail investing through Internet and along with it the various websites available with software for analysis using the tools has become easier. But all said and done it is not very easy to get conclusions out just by applying tools, far more important issues are regarding the financial goals, the risk taking ability of the investor are equally important. Also it is very necessary to keep on learning and brushing up on the basics of this subject and along with it select own set of tools with which one is comfortable (as mentioned earlier there a re hundreds of indicators and oscillators) and put them to use in correct way And most importantly developing a clear cut investing strategy. Most important factor is the limitation of Technical Analysis is the unanswered questions in like why to invest? Where to invest? What to invest in? How much to invest? Technical analysis just answers only when to invest? So it becomes imperative for the investor to know the basics of analyzing fundamentals of any stock, as it will provide him answers to above-mentioned questions. One should also make sure that the do keep a watch on fundamental of the company in which there are investing because its the fundamental that change the valuation of the company. So it is advisable that one should combine Fundamental and Technical analysis accounts for a better approach to investing making investments perception free and healthier.

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10. Recommendation

The work done in the office was all computerized and hardly work was done manually, so there was less chance for the error except if some enters the wrong trade. However some changes to be brought for the benefit of the firm:
Upgradation of the software which help the employee to analysis technically which

indirectly helps investor to enter at the right time. Confirmation of the trade should be done through SMS automatically.
There should be specialization of the work done by the employees.

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