TECHNICAL

What to Expect?
ANALYSIS
a. Introduction to Technical Analysis
b. 3 Hours is too less a time to expect anything w.r.t Technical Analysis,
there’s too much out there
c. Expect just an introduction to what is technical analysis
d. Get yourself convinced by end of the presentation that technical analysis
is good enough to buy and sell stocks.
 Introduction
• Should I take a long position? Should I take a short
position? What is going to be the price tomorrow,
next week or next year?

• Technical analysis is the attempt to forecast

stock prices on the basis of market-derived
data.
• Technicians (also known as quantitative
analysts or chartists) usually look at price,
volume and psychological indicators over
time.
• What wiki says?
• Technical analysis is a security analysis discipline for forecasting the future
direction of prices through the study of past market data, primarily price and
volume.
• John J. Murphy:
• TA is the study of market action, primarily through the use of charts, for the
purpose of forecasting future price trends.

• Bottom Line:
• Technical analysis is a method to predict the future behaviour of securities, with the
How to do Technical Analysis?

TECHNICAL Fundamental
ANALYSIS Analysis

Industry
Theories
Analysis

Company
Charting
Analysis

Moving Economic
Averages Analysis
 Trend
time horizons that vary greatly

Do charts
Speak?

Stock Price trend of Jet Airways

Do charts Speak?
• Consider the basic assumptions presented by Robert D. Edwards and John
Magee in the classic book, Technical Analysis of Stock Trends:
• Stock prices are determined solely by the interaction of demand and supply.
• Stock prices tend to move in trends.
• Shifts in demand and supply cause reversals in trends.
• Shifts in demand and supply can be detected in charts.
• Chart patterns tend to repeat themselves.

Stock Price trend of Jet Airways

Technical analysis is based on one major assumption—trend. Markets trend.

Traders and investors hope to buy a security at the beginning of an uptrend at a low
price, ride the trend, and sell the security when the trend ends at a high price.

Although this strategy sounds very simple, implementing it is exceedingly complex.

 Different Kind of Charts used:
Charting the Market
1. Line charts

• Chartists use bar charts, candlestick, or

2. Bar charts point and figure charts to look for patterns
which may indicate future price movements.

3. Candlesticks • They also analyze volume and other

psychological indicators (breadth, % of bulls vs
% of bears, put/call ratio, etc.).
• Strict chartists don’t care about fundamentals
at all.
 Candlesticks
Drawing Bar (OHLC) Charts

A candlestick chart is a style of bar-chart used

primarily to describe price movements of a
security, derivative, or currency for a designated
span of time.
It is a combination of a line-chart and a bar-
chart, in that each bar represents the range of
price movement over a given time interval.
A chart that displays the high, low, opening
and closing prices for a security for a single day.
High High

Close Open • Each bar is composed

of 4 elements:

• Open
• High
Open Close
• Low
Low Low • Close
Standard Japanese Standard Japanese
Bar Chart Candlestic Bar Chart Candlestic
k k
The wide part of the candlestick is
called the "real body" and
tells investors whether the closing price
was higher or lower than the opening
price (black/red if the stock closed
lower, white/green if the stock closed
higher).
 Line Chart
• A style of chart that is created by connecting a series of data points
together with a line.
• This is the most basic type of chart used in finance and it is generally
created by connecting a series of past prices together with a line.
• A line chart can give the reader a fairly good idea of where
the
price of an asset has traveled over a given time frame.

Infosys
 Head and Shoulders
This formation is characterized by two small peaks on either side of a
larger peak.
head-and-shoulders chart pattern
1. Rises to a peak and subsequently declines.
H&S Top Then, the price rises above the former peak
Head
and again declines.
2. And finally, rises again, but not to the
second peak, and declines once more.
Left Shoulder Right Shoulder 3. The first and third peaks are shoulders, and
the second peak forms the head

Neckline Inverse Head-and-Shoulders

This is a reversal pattern, meaning that it
H&S Bottom signifies a change in the trend.
Neckline
Formation of the pattern:
1. Left shoulder: Price declines and
Left Shoulder moves higher.
Right Shoulder
2. Head: another Decline occurs to a
lower level.
Head
3. Right shoulder: Price then moves
In this pattern, the neckline is a higher and moves back lower, but
level of support or resistance. not as low as the head
 How to Trade the Pattern?
It is very important that traders wait for the pattern to complete.
•In the head and shoulders we are waiting for price action to move
lower than the neckline after the peak of the right shoulder.
•For the inverse head and shoulder, we wait for price movement
above the neckline after the right shoulder is formed.
H
S
S
Support
Level

Sell Signal
 Double Bottom Example

Buy Signal

support
Level
 Double Tops and Bottoms

Double Top
• These formations are similar to
the H&S formations, but there
is no head.
• These are reversal patterns
with the same measuring Target

implications as the H&S. Target

Double Bottom
 Trends
 The meaning of trend in finance isn't all that different from the
general definition of the term - a trend is really nothing more
than the general direction.

 A trend represents a consistent change

in prices (i.e. a
change in investor’s expectations)

 A trendline is a simple charting technique that adds a line to a

chart to represent the trend in the market or a stock.
 Types of Trend

 Uptrends
 Types of Trend

 Downtrend
 Types of Trend

 Sideways Trend
 Support and Resistance
 Support level is a price level where the price
tends to find support as it is going down
 Support and Resistance
 Resistance Level is a price level where the price
tends to find resistance as it is going up
 Importance of Support and Resistance

 Support and resistance analysis is an important part

of trends because it can be used to make
trading decisions and identify when a trend is
reversing.
 Aware: Support and Resistance levels

 Support and Resistance levels are

highly volatile

 Traders should not buy and sell directly

at these points as there may be
breakout also

A support is plotted at the daily low price

and resistance at the daily high price.
 Breakout

 The penetration of support and

resistance level is called breakout
 Trader’s Remorse
 Returning to the level of support or resistance
after a breakout is called trader’s remorse.
Resistance <-> Support
 Moving Averages
• A simple moving average is formed by computing the average
(mean) price of a security over a specified number of periods.
• While it is possible to create moving averages from the Open,
the High, and the Low data points, most moving averages are
created using the closing price.
• For example: a 5-day simple moving average is calculated by
adding the closing prices for the last 5 days and dividing the total by
5.

Continuing our example, if the next closing price in the average is 15,

then this new period would be added and the oldest day, which is 11,
would be dropped.
 Moving Averages
An indicator is anything that can be used to predict future financial
or economic trends.

•Leading (Bullish)-Above average

• Leading - These types of indicators signal future events.

•Lagging (Bearish)-Below Average

• A lagging indicator is one that follows an event.

1. Relative Strength Index (RSI)

2. Moving average convergence divergence (MACD)
3. Fibonacci Retracement
1. Note that all moving averages are
lagging indicators and will always be
"behind" the price.
2. When prices are trending, moving
averages work well.
3. However, when prices are not trending,
moving averages can give misleading
signals.
Moving Averages
 DOW
THEORY
• How Dow Theory was made?
Introduction
and
• Dow theory was formulated from a series of Wall Street
Journal editorials authored by Charles H. Dow from 1900
Historical
until the time of his death in 1902. Perspective
• What is Dow theory?
• These editorials reflected Dow’s beliefs on how
the stock market behaved and how the market
could be used to measure the health of the
business environment.
• Who made Dow theory?
• Due to his death, Dow never published his complete
theory on the markets, but several followers and
associates have published works that have
expanded on the editorials.
• Some of the most important contributions to Dow
theory were William P. Hamilton's "The Stock
Market Barometer" (1922), Robert Rhea's "The Dow The Dow theory on
stock price
Theory" (1932), E. George Schaefer's "How I Helped
movement is a form
More Than 10,000 Investors To Profit In Stocks" (1960)
of technical analysis
and Richard Russell's that includes some
aspects of sector
rotation.
• Dow first used his theory to create the Dow Dow Theory
Jones Industrial Index and the Dow Jones Rail
Dow himself never
Index (now
Transportation Index), which were originally used the term Dow
compiled by Dow for The Wall Street Journal. theory nor presented
it as a trading system.
• Dow created these indexes because he felt they
were an accurate reflection of the business
conditions within the economy because they
covered two major economic segments: industrial
and rail (transportation).
• While these indexes have changed over the last 100
years, the theory still applies to current market
indexes.

1. Dow believed that the stock market as a whole was

a reliable measure of overall business conditions within
the economy.
2. By analyzing the overall market, one could accurately
gauge those conditions and identify the direction
of major market trends and the likely direction of
individual stocks.
 Six basic tenets of Dow theory
1. The market has three movements
2. Market trends have three phases
3. The stock market discounts all news
4. Stock market averages must confirm each other
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended
 1. The market has three movements
Dow theory identifies three trends within the market:
primary, secondary and minor.

• Primary Trend
• The "main movement", primary movement or major trend may last from
less than a year to several years. It can be bullish or bearish.
• Secondary Trend
• The intermediate trends are corrective movements, which may last for
three weeks to three months. The primary trend may be interrupted by
the intermediate trend.
• Minor Trend
• The short term trend refers to the day to day price movement.

 Most proponents of Dow theory focus on the

primarytheir
and secondary
attention trends, as minor trends tend to include
a
considerable amount of noise.
If too much focus is placed on minor trends, it can to lead
to irrational trading, as traders get distracted by short-term
volatility and lose sight of the bigger picture.
 1. The market has three movements
Tata Motors - 2 years

Primary Trend

The "main
movement",
primary
Tata Motors – 5 years
movement or
major trend
may last from
less than a
year to
several years.
It can be
bullish or
bearish. Tata Motors – 1 years
 Kingfisher Airlines– 5 years

Kingfisher Airlines- 2 years

Kingfisher Airlines– 1 years

 He postulated three types of price
movements over time:

• (1) major trends that are like tides in the ocean,

• (2) intermediate trends that resemble waves, and
• (3) short-run movements that are like ripples.
 2. Market trends have three phases
Dow theory asserts that major market trends are composed of
three phases:

•Primary Upward Trend (Bull Market)

• The first stage of a bull market is referred to as the accumulation phase, which is
the start of the upward trend. This is also considered the point at which
informed investors start to enter the market.
• The accumulation phase typically comes at the end of a downtrend,
when everything is seemingly at its worst.
• But this is also the time when the price of the market is at its most
attractive level because by this point most of the bad news is priced into
the market, thereby limiting downside risk and offering attractive valuations.
• However, the accumulation phase can be the most difficult one to spot
because it comes at the end of a downward move, which could be nothing
more than a secondary move in a primary downward trend - instead of being
the start of a new uptrend.
The first phase is the accumulation phase, where the asset quietly
goes up without too much attention being paid by the general
public, and few people participate. This is the “dirt cheap”
phase of gold when only true believers assumed positions
 Uptrend
Lower Peaks ---Buy--Up Tread

Primary Upward Trend (Bull Market)

 2. Market trends have three phases
Dow theory asserts that major market trends are composed of
three phases:

•Primary Downward Trend (Bear Market)

• The second phase is the awareness phase, where

seasoned professionals and a few more sophisticated funds
take their positions.
• The general public begins to take notice and some people
participate, driving prices higher at a little faster pace.
• This is also a more volatile phase, where we could see
more
substantial daily price swings.
• It is in the second phase where we see the most
painful secondary corrections (Where we currently are).
• This phase will also be characterized by persistent
market pessimism, with many investors thinking things will
only get worse.
 Uptrend
Higher Peaks---Sell--Down trend

Primary Downward Trend (Bear Market)

The Panic Phase
• Every major primary bull market ends up with
a wildly speculative third phase, which is the
panic phase, where the public and crowd rush
head- long into the market, driving
prices up exponentially
• In the panic phase, the market is wrought up with
negative sentiment, including weak outlooks
on companies, the economy and the
overall market.
 3. The stock market discounts all
news
• Stock price represents sum of all hopes, greed, fears and expectations of
all the traders and investors and stock price discounts all information’s.
• What Information’s Stock Market Discount’s?
• Stock Market quickly reflects information’s in it’s price, as soon as
any information or news is available about stock, market will discount all
such information weather it’s related to past, present and also for the
future therefore, it becomes easy to analyze future price movements on the
basis of technical analysis.
• So, the person who is following technical analysis for them Dow theory
states that stock market discounts all information in stock prices so one doesn’t
need to follow other news and information’s like rate of interests,
company announcements and all such information will be reflected in
price so all you have to keep an eye on is the stock price movements.
3. The stock market discounts
all news
• What Stock Market Doesn’t Discount’s?
• Stock Market doesn’t discounts natural calamities like
Tsunami, Earthquakes etc. All such information doesn’t discounts
stock market prices.
4. Stock market averages must
confirm each other
• Under Dow theory, a major reversal from a bull to a
bear market (or vice versa) cannot be signaled
unless both indexes (traditionally the Dow Industrial and
Rail Averages) are in agreement.
5. Trends are confirmed by
volume
• Dow believed that volume confirmed price trends.
• When prices move on low volume, there could be many
different explanations.
• But when price movements are accompanied by high volume, Dow
believed this represented the "true" market view.
• If many participants are active in a particular security, and the price
moves significantly in one direction, Dow maintained that this
was the direction in which the market anticipated continued
movement. To him, it was a signal that a trend is developing.
6. Trends exist until definitive signals
prove that they have ended
• It relates a physical law to market movement, which states that
an object in motion (in this case a trend) tends to continue in motion
until some external forces causes it to change direction.
• Dow was a firm believer that market remains in a trend. It may
deviate for a while because of noise but it will return as soon as
its effect is over.
• There are many trend reversal signals like support/resistances,
price patterns, trend lines, moving averages. Some indicators
can also provide warnings of loss of momentum.
Summary
1. The market has three movements
2. Market trends have three phases
3. The stock market discounts all news
4. Stock market averages must confirm each other
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended

The Dow Theory is a market timing

strategy based upon technical
analysis.