5 technical analysis
TRANSCRIPT
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TECHNICAL ANALYSIS
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TECHNICAL ANALYSIS
Alternative approach to predicting stock pricebehavior
The technician does not consider value in thesense in which the fundamentalist uses it. Thetechnician believes the forces of supply anddemand are reflected in patterns of pr ice andvo lumeof trading.
By examination of these patterns, he predictswhether prices are moving higher or lower, andeven by how much. In the narrowest sense, the
technician believes that price fluctuation reflectlogical and emotional forces.
He further believes that price movements,whatever their cause, once in force persist for someperiod of time and can be detected.
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IMPORTANCE OF VOLUME
Volume is simply the number of shares or contracts
that trade over a given period of time, usually a day.
The higher the volume, the more active the security.
To determine the movement of the volume (up or
down), chartists look at the volume bars that canusually be found at the bottom of any chart. Volume
bars illustrate how many shares have traded per
period and show trends in the same way that prices
do.
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IMPORTANCE OF VOLUME CONTD
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IMPORTANCE OF VOLUME CONTD
Volume is an important aspect of technical analysis
because it is used to confirm trends and chart
patterns. Any price movement up or down with
relatively high volume is seen as a stronger, more
relevant move than a similar move with weakvolume. Therefore, if you are looking at a large
price movement, you should also examine the
volume to see whether it tells the same story.
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IMPORTANCE OF VOLUME CONTD
Say, for example, that a stock jumps 5% in one
trading day after being in a long downtrend. Is this a
sign of a trend reversal?
This is where volume helps traders. If volume is
high during the day relative to the average daily
volume, it is a sign that the reversal is probably for
real.
On the other hand, if the volume is below average,
there may not be enough conviction to support atrue trend reversal.
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IMPORTANCE OF VOLUME CONTD
Volume should move with the trend. If prices are
moving in an upward trend, volume should increase
(and vice versa). If the previous relationship
between volume and price movements starts to
deteriorate, it is usually a sign of weakness in thetrend.
For example, if the stock is in an uptrend but the
up trading days are marked with lower volume, it is
a sign that the trend is starting to lose its legs andmay soon end.
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VOLUMEAND CHART PATTERNS
The other use of volume is to confirm chart patterns
In most chart patterns, there are several pivotal
points that are vital to what the chart is able to
convey to chartists. Basically, if the volume is not
there to confirm the pivotal moments of a chart
pattern, the quality of the signal formed by the
pattern is weakened
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VOLUME PRECEDES PRICE
Another important idea in technical analysis is that
price is preceded by volume. Volume is closely
monitored by technicians and chartists to form
ideas on upcoming trend reversals. If volume is
starting to decrease in an uptrend, it is usually asign that the upward run is about to end
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DOW THEORY
Charles H. Dow formulated a hypothesis that the
stock market does not perform on a random basis
but is influenced by three distinct cyclical trends
that guide its general direction. By following these
trends, he said, the general market direction can bepredicted. Dow classified these cycles as primary,
secondary and minor trends. The primary trend is
the long-range cycle that carries the entire market
up or down.
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DOW THEORYCONTD.
The basic proposition in the Dow Theory is
relatively simple. A bull market is in process when
successive highs are reached after secondary
corrections and when secondary upswings advance
beyond previous secondary downswings
The theory also requires that the secondary
downswing corrections will be of shorter duration
than the secondary upswings. The reverse of these
propositions would be true of a bear market
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DOW THEORYCONTD.
The classical Dow Theory utilizes both the industrial
average and the transportation average in
determining the market position. When both
averages are moving in the same direction, valid
indicators of a continuing bull or bear market areimplied.
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PRIMARY TREND
The security price trend may be either increasing , it is called Bull Market.
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TREND LINES
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TREND
Trend is the direction of movement-it can be
increasing trend(Bullish), decreasing trend
(Bearish) and flat trend.
It represents the emotions ,sentiments of the
players in the market.
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TREND REVERSAL
The raise or fall in the share price cannot go on for
ever
The share price movement may reverse its
direction
Before the change of direction certain pattern in
price movement emerges
Change in the direction of the trend is shown by
violation of the trend line. If the scrip price cuts the
trend line from above it signals the possibility of the
fall in price
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PRIMARY TREND
Security price behavior shows an increasing or
decreasing trend
In the BULLISH market
Each peak is higher than the previous peak
Each bottom is higher than the previous bottom
In the BEARISH market
Each peak is lower than the previous peak
Each bottom is lower than the previous bottom
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SECONDARY TREND
Also known as intermediate trend
Moves against the main trend and leads to
correction
This corrects the over bought and over sold position This takes less time than the primary trend and
generally a lot quicker
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MINORTREND
Relate to day to day price fluctuations
It tries to correct the secondary trend movement
Considered to be of less significance to a chartist
than primary and secondary trend These three concepts of primary ,secondary and
minor trends form the basic foundation of Technical
Analysis
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SUPPORT LEVEL AND RESISTANCE
LEVEL
Support level exists at a price where there is a
reversal of the demand supply position
Resistance level exists at a price where there is a
reversal of demand supply position
This signifies that the share price cannot rise
beyond the resistance level
At the resistance level price , there will be more of
supply than demand and hence a reversal in trend
will take place
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GROUND RULES OF TECHNICAL
ANALYSIS
Rule 1: Market action discounts everything
The market price of the shares of a Company is
the culmination of all the factors affecting the
fortunes of the business of that company
Players in the market act upon any change in the
fundamental factors of a security by buying or
selling the shares
Any news that is awaited or has been received or
any new information about the company is
reflected in the market price. This is by means of a
demand / supply shift
If demand rises, the price goes up; if supply rises,
prices fall
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GROUND RULES OF TECHNICAL
ANALYSIS Contd.
Rule 1: Market action discounts everything(contd.)
Technical analysts believe that whatever changes
occur in the fundamentals of a company, they are
discounted in the market.
By the time one tries to analyse what causes prices to
change rumours of war, merger news, etc. the
prices would have already changed. Further, trying to
forecast a price by analysing the fundamental factors is
too unwieldy, as there are just too many factors to beanalysed
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GROUND RULES OF TECHNICAL
ANALYSIS CONTD
Rule 2: Prices move in trends and trends persist
Technical analysts believe that prices continue to move
in a certain direction unless some event occurs to
change its direction .Thus, technical analysts believe
that prices do not move in a random manner.
It has to be noted that the supply and demand balance
sets the trend in motion.
This trend does not change, unless the balance in the
demand / supply undergoes a change. This is aptly put
in the maxim The trend is yourfriend
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GROUND RULES OF TECHNICAL
ANALYSIS CONTD
Rule 3:History repeats itself
Technical analysts believe that markets repeat
themselves. This belief is based on the fact that, it
is people who drive prices and market is the
reflection of the actions of the participants
Investors and traders tend to react in a similar way
every time an event occurs. These reactions
become transactions in the market place, which
tend to repeat.
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CHARTS
The basic tool of a technician is the price chart.
Charts can be made for different time horizons
depending on the use the technician wants to put it
to, ranging from a day to a week to a month
Accordingly, charts can be daily, weekly or monthly
depending on the time horizon for which we need to
apply the various technical analysis tools
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PRICE BAR CHART
A Bar is formed by joining the highest price and the
lowest price of a particular sale by a vertical line.
The closing price of the day is marked by a
horizontal mark on this vertical line
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LINE CHARTS
These charts are made up of closing prices.
Line Charts have time on the X-axis and price on its
Y-axis
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TOOLS OF TECHNICAL ANALYSIS
Moving Average
An average is the sum of prices of a share over
some weekly periods divided by the number of
weeks. This point is market on the latest date for
which a price bar has been plotted. This process is
repeated for the previous dates. The points thus
obtained are connected together to give the Moving
Average line
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HOWTOCALCULATE MOVING AVERAGE
Week Closing Price Total of Price for five weeks 5-week average=total/5
1 22
2 25
3 26
4 24
5 28.5 125.5 25.1
6 29 132.5 26.5
7 28 135.5 27.1
8 26.5 136 27.2
9 27.5 139.5 27.9
10 25 136 27.2
11 23.5 130.5 26.1
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WHATDOTHEMOVINGAVERAGESDEPICT
Moving Averages smoothen out the apparent erratic
movement of share prices and highlight the
underlying trend
In an Exponential Moving Average, more weight is
given on the most recent data and less weight isgiven to the older data
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EXPONENTIAL MOVING AVERAGE CHART
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MACD
MACD stands for
Moving Average Convergence /Divergence
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
Signals are generated by crossovers and
divergence from price
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MACD CONTD
The MACD method, developed by Gerald Appel, is a trending
indicator, telling us whether a stock is in an uptrend or a
downtrend. The direction of the long-term trend is the first
assessment you should make of any market. If it is
trending up, you want to be long (buying). If it is trending
down, you want 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 26-day and 12-day
EMA, based on the daily close, and a 9-day EMA for the
signal line
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MACD CHART
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TOOLS OF TECHNICAL ANALYSIS CONTD...
Rate-of-Change (Momentum)
It indicates the rate of change of the price as compared to the
price a certain period back
ROC depicts the speed of upward or downward movements of
the price ahead of the price movement ROC is a price momentum or velocity indicator.
A rising ROC indicates a bullish increasing momentum
A falling ROC indicates a bearish decreasing momentum
ROC should always be used in conjunction with reversalsignals on the price chart.
ROC is a momentum indicator that measures velocity and
also leads the price action
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CALCULATIONOFRATE-OF-CHANGE
WEEK Closing Price Price Seven weeks ago Ratio of the two prices ROC=Ratio less 1
1 49
2 50
3 52
4 54
5 55
6 56
7 56 49 1.14 0.14
8 55 50 1.1 0.1
9 54 52 1.04 0.04
10 48 54 0.89 -0.11
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ROC CHART
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RSI
Relative Strength index(RSI)
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) can provide an
early warning of an opportunity to buy or sell
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RSI CONTD
Relative Strength index
This index emphasizes market moves before they
occur.
When the price of a stock advances, the closing
price is higher than the closing price of the previous
day. When the price of the stock declines, the
closing price is lower than the closing price of the
previous day.
However, the rise or fall of a market is not smooth.During the rising phase, the price falls several
times, while during the falling phase, the price rises
several times.
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Relative Strength index Contd
Relative Strength Index tells us whether the net
difference between the closing prices is increasing
or decreasing.
During the rising phase of the market, the prices
move up fast, and the differences between the
recent close and the previous close are large.
When the market reaches the top, these differencesreduce. When the market declines, the different
again become large
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Relative Strength index Contd.
RSI = 100 [100/ (1+RS)] Where
RSI = Average of 14 weeks up closing pricesAverage of 14 weeks down closing prices
This is powerful indicator and pinpoints buying and
selling opportunities ahead of the market. It ranges
in value from 0 to 100.
Values above 70 are considered to denote
overbought conditions, and values below 30 are
considered to denote oversold conditions.
If the RSI has crossed the 30 lines from below toabove and is rising, a buying opportunity is
indicated. If it has crossed the 70 lines from above
to below indicates a selling opportunity
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RSI CHART
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TOOLS OF TECHNICAL ANALYSIS CONTD...
oscillator
The values of the 10-week moving average are
subtracted from the values of the 2-week moving
average. These differences are plotted on a
horizontal zero line
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TOOLS OF TECHNICAL ANALYSIS CONTD...
What help does an Oscillator give?
An Oscillator is an excellent indicator of overbought
/ oversold conditions.
Values above the zero line indicate that buying is in
progress, while values below the zero line indicate
that selling is in progress. When the Oscillator
moves from negative to positive, it shows a
possible buying opportunity. When the Oscillator
moves down from the positive towards thenegative, it indicates that selling may be considered