FUNDAMENTAL AND

TECHNICAL ANALYSIS

MODULE- 3
TOOLS AND TECHNIQUES OF
TECHNICAL ANALYSIS
Dow theory and Elliott Wave theory being simple help in identifying he long term
trends with short term deviations around those trends. Over the years, several charts
and patterns have been developed to extrapolate the future prices from current
prices.
 Price and volume charts

• The objective of technical analysis is to identify the price trends

on the basis of historical data; and the technical analyst known
as chartist uses charts and graphs as the basic tools to identify
the trends in prices.
• A price char is a simple two axis chart with time on x axis and
price on the y axis. When the volume of transactions for a day is
also shown in a price chart it is known as price volume chart.
 BAR CHART

• One of the basic tools of technical analysis is the bar

chart, where the open, close, high, and low prices of
stocks or other financial instruments are embedded in
bars which are plotted as a series of prices over a
specific time period. Bar charts allows traders to see
patterns more easily.
 LINE CHARTS
• Line Charts are the most basic type of chart because it represents
only the closing prices over a set period. The line is formed by
connecting the closing prices for each period over the timeframe.
While this type of chart doesn’t provide much insight into
intraday price movements, many investors consider the closing
price to be more important than the open, high, or low price
within a given period. These charts also make it easier to spot
trends since there’s less ‘noise’ happening compared to other chart
types.
 Point and figure chart
• They are used by technical analyst to predict the extent and direction of the price
movements of a particular stock or stock market indices. It differs in concept and
construction from other charts. It has no time dimension and records changes in
prices that are larger than a predetermined amount.
• The price is shown on the y axis. Each column or movement along the X axis
represents a reversal in the direction of price movements. Successive price
increases, equal to or larger than predetermined points, are recorded by putting X
in an upward column as long as the uptrend continues. If the price drops by an
amount equal to or larger than predetermined, points the chartist shifts to the next
column and enters 0 in a downward progression until the trend is reversed.
 Candlestick charts

• A candlestick is a type of price chart used that displays the high,

low, open and closing prices of a security for a specific period. It
originated from Japanese rice merchants and traders to track
market prices and daily momentum hundreds of years before
becoming popularized in the United States. 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).
 Pattern analysis

• The pattern analysis reveals the tendency of price movements

in a particular direction or to repeat the same formation over
and over again. A chart pattern is a distinct formation on a
stock chart that reflects a trading signal or a sign of future price
movements. The price patterns can be used to forecast end of
bull or bear phase; reversal of trend in prices, direction of the
new change and confirmation of the new trend. Some of the
widely used and easily recognisable chart patterns are
discussed hereunder:-
 1. Trend

• Trend is a long term price pattern over a period of one year to three years. The basic
tendency of prices can be identified as increasing or decreasing trend. There are three
types of trend: (i) up trends, (ii) down trends, (iii) side ways/ horizontal trends.
• When each successive peak and through is higher, its referred to as an upward trend.
If the peaks and troughs are getting lower it’s a downward trend. When there is little
movement up or down in the peaks and troughs it’s a sideways or horizontal trend.
• Along with these three directions there are three types of trends. A trend of any
direction can be classified as-
• (i) long term trend: lasting for more than a year
• (ii) intermediate trend: last between one to three months
• (iii) short term trend: is anything less than a month
 2. Head and shoulders
• Head and Shoulders formation consists of a left shoulder, a head, and a right shoulder and a
line drawn as the neckline. The left shoulder is formed at the end of an extensive move
during which volume is noticeably high. After the peak of the left shoulder is formed, there
is a subsequent reaction and prices slide down to a certain extent which generally occurs on
low volume. The prices rally up to form the head with normal or heavy volume and
subsequent reaction downward is accompanied with lesser volume. The right shoulder is
formed when prices move up again but remain below the central peak called the Head and
fall down nearly equal to the first valley between the left shoulder and the head or at least
below the peak of the left shoulder. Volume is lesser in the right shoulder formation
compared to the left shoulder and the head formation. A neckline is drawn across the bottoms
of the left shoulder, the head and the right shoulder. When prices break through this neckline
and keep on falling after forming the right shoulder, it is the ultimate confirmation of the
completion of the Head and Shoulders Top formation. It is quite possible that prices pull
back to touch the neckline before continuing their declining trend.
 Inverted head and shoulders
• The bullish variant of the Head and Shoulders pattern is the Inverse Head and
Shoulders pattern. An Inverse Head and Shoulders pattern is likely to form
after a declining trend and is simply an upside-down version of the regular
H&S pattern.
• Is the H&S pattern a continuation pattern or a reversal pattern ?

As said before, a Head & Shoulders pattern can act as a reversal pattern or as a
continuation pattern, depending on the trend in which it forms and on the type of
the H&S. If, during a downtrend, an Inverted Head and Shoulders pattern forms,
the pattern will likely act as a reversal pattern, leading to an uptrend after the
formation of the pattern. If, during a downtrend, a regular Head and Shoulders
pattern forms, it might lead to continuation of the current downtrend.
 3. Double tops and bottoms
• Double top and bottom patterns are chart patterns that occur when the
underlying investment moves in a similar pattern to the letter "W" (double
bottom) or "M" (double top). Double top and bottom analysis is used
in technical analysis to explain movements in a security or other investment, and
can be used as part of a trading strategy to exploit recurring patterns.
• If the double top is formed when a stock price rises to certain level, falls rapidly,
again rises to the same height or more and turns down. Its pattern resembles the
letter ‘M’. The double top may indicate the onset of the bear market.
• In a double bottom, the prices of the stock falls to a certain level and increase
with diminishing activity. Then it falls again to the same or to a lower price and
turns up to a higher level. The double bottom resembles the letter W. Technical
analysts view bottom as a sign for bull market.
 4. TRIANGLES
• The triangle can be a continuation or a reversal pattern.
Although, more often it is a continuation pattern. There are three
types of triangles: symmetric, ascending, and descending. For
trading purposes they are all the same, the just look different.
• A triangle forms when the price action narrows over
several price swings. If trendlines are drawn along the highs and
lows of the price action, the trendlines converge towards each
other. This creates the appearance of the triangle.
 Continued…
• Ascending triangles are a bullish formation that
anticipates an upside breakout.
• Descending triangles are a bearish formation that
anticipates a downside breakout.
• Symmetrical triangles, where price action grows
increasingly narrow, may be followed by a
breakout to either side, up or down.
 5. Flags

• Flag Patterns are chart patterns, formed by price action, which is

contained within a small rectangle or a parallelogram. This is created when there
is a minor profit booking in either an uptrend or a downtrend.
• They are the pressure areas in a stock chart, which may be a minor support or
resistance, or it may even be a minor target. Here some traders want to book
profit. But what ever the trend was, remains unchanged. This may result in a
small swing or the price may remain flat. Both the support and resistance lines
are either horizontal or sloping downwards in an uptrend or sloping upwards in a
down trend.
• It is a continuation chart pattern. It is so named because the pattern is in the form
of a Flag. Hence the name Flag Chart Pattern.
 6. Support and resistance level
• In stock market technical analysis, support and
resistance are certain predetermined levels of the price of
a security at which it is thought that the price will tend to
stop and reverse. These levels are denoted by multiple
touches of price without a breakthrough of the level.
• When prices are falling, support represents the moment
when buying overwhelms selling and prices reverse.
Conversely, when stocks are moving higher, resistance is
the point where selling overwhelms buying and the price
increase stop