financial market and technical analysis

Financial Market&

Technical Analysis

Presented by-Arpit SoniPGDM 2015-17IILM- AHL, Jaipur

Date- 6 Sept.,2016

Overview

• Financial Market • Terminologies relating to Financial Market• Components of Financial Market• Financial Analysis• Overview of Different types of Analysis• Basics of Technical Analysis

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Financial Market

• A Market Place for Financial Securities

• Financial Securities includes Equity, Commodities, Derivatives.

• Exchange of Financial Securities for Cash or Premiums.

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Terminologies• Shares: Ownership Portion of Large Capital divided among a

no. of people and institutions.• Equity Shares: Equity Shareholders have voting rights and

are part owners of the company up to the extent of their holdings

• Preference Shares: Share which entitles the shareholder to a fixed dividend, and have priority over equity shareholders.

• Bonds: A financial instrument which shows indebtness of issuing body towards its holders.

• Debentures: Debt instrument used to raise long term finance.

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Terminologies• Stock Market: Aggregation of buyers and sellers of stocks.• Stock Exchange: Place where traders and brokers can buy or

sell stocks of the companies.• Long: Buying of the shares.• Short: Selling of the shares that the seller currently don’t

owns.• Bulls: Optimistic person who believes that prices will go up.• Bears: Pessimistic person who believes prices to go down.• Index: Weighted average share price of selected stocks.

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Components of Financial Market

Financial Market

On the basis of Market Level

Primary Market

Secondary Market

On the basis of Security

Types

Money Market

Capital Market

Equity Market

Debt MarketCommodity

Market

Forex Market

Derivative Market5

Primary Market• Also known as “New Issue Market”

• Deals with new issue of securities

• Securities are sold for the first time.

• Issued by company to investors.

• Used by companies for setting up of new business or expansion or modernisation of existing business.

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Secondary Market• Market for “Existing Shares”

• Also known as “After Market”

• Investors purchase securities from other investors, rather than the company itself.

• Securities are quoted on stock exchange

• Continuous and regular market for stocks7

Money Market• Short term market

• High liquidity market

• Maturity ranges from one day to one year

• Instruments:– Commercial Paper– Bills of Exchange – Treasury Bill

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Capital Market• Long term market

• Trading of financial securities

• Comprise of Primary and Secondary Market

• Instruments:– Shares– Debentures– Bonds

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Commodity Market• A commodity market is a marketplace for buying, selling of

raw or primary products.

• Commodities are split into two types: hard and soft commodities.

• Hard commodities: Natural resources that must be mined or extracted (such as Gold, Rubber and Oil)

• Soft commodities : Agricultural products or livestock (such as corn, wheat, coffee, sugar, soybeans and pork).

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Forex Market• Also known as Interbank Market

• Largest and the most liquid market

• Trading of currencies among Financial Institutions and Banks.

• Excludes retail investors and small trading parties.

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Derivative Market• Derivative: A financial contract which derives its value from

the performance of another entity such as an asset or index called the “Underlying Asset". 

• Underlying assets: Commodities, Forex Currencies, Shares, Index points, Short Term Securities.

• Derivatives are of 4 types: Forwards, Futures, Swaps and Options

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Types of Derivatives

• Forwards: An agreement between buyer and seller to exchange a specified asset (commodity, currency, instruments) at future date at a pre-determined price specified in agreement. They are non standardised traded contracts.

• Futures: An agreement between two parties to buy or sell an asset (commodity, instruments,shares) at a particular price on a future date. They are traded on stock exchanges.

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Types of Derivatives• Options: A contract giving the holder the right, but not the

obligation, to buy or sell an underlying asset (a stock or index) at a specific price on or before a certain date.

• Swaps: Private agreement between two parties to exchange cash flows in the future according to predetermined arrangements.

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Analysis of Financial MarketAnalysisTechnical Analysis

Quantitative

Behavioural

Fundamental AnalysisBalance Sheet

Profit and Loss

Predictions

Economic AnalysisEconomic Cycle

Sectoral Analysis

Economic Indicators

Global Market

Currency and Bonds

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Fundamental Analysis• A stock valuation methodology to predict future price

movement of the stocks.• Calculation of Intrinsic value.• Includes analysis of Financial reports and non financial

information of the company• Financial reports includes Balance Sheet, Profit and Loss

Account, Cash Flows, Financial Ratios.• Non Financial Information includes Products’ demand,

Industry comparisons, Future growth prospects etc.

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Economic Analysis• Estimation of the economic environment.

• SWOT analysis of the economy.

• Analysis of Global market, National economy analysis, Economic Indicators’ analysis, Government Policies and Political stability.

• Financial health of the Nation.

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Technical Analysis• Forecasting the direction of the prices through study of

historical market data

• Involves putting the stock information like Price, Volume and Open Interest on a chart

• Application of various patterns and indicators

• 80% psychology and 20% logical

• Different time frames.18

Assumptions of Technical Analysis• Market Discounts everything

• Price moves in trends

• History tends to repeat itself

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Basics of Charting• Chart: Graphical representation of a series of prices over a set time

frame. 

• Plotting of Price movements of a stock over a period of time frame.

• X Axis represents: Time

• Y Axis represents: Price

Software

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Time Scale• Tick on Tick Chart- based on volume transactions.

• Intraday Chart- for short term traders

• Daily Chart- EOD data, Valid for a week

• Weekly Chart- Valid for Next month

• Monthly Chart- Valid for 3-6 months

• Yearly Chart- Valid for a decade

Software

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Price Scale• On the right hand side of the chart

• 2 scales: Linear and Logarithm

• Linear Scale: Equal space between consecutive price points.

• Logarithm Scale: Distance between two price points is same in terms of Percentage change.

Software

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Line Charts• Formed by connecting the closing prices of a specific stock or

market over a period of time.

• Useful for providing clear visual illustration of trend of stock price movement.

• Only gives one information at one point of time.

Software

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Bar Charts• Used to see price action in a stock over a given period of time.

• Shows high price at the top and lowest price at the bottom of the bar.

• Small lines on either side of the vertical bar shows opening price and closing price.

Software

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Candlestick Charts• Originated from Japan

• Displays Open, High, Low, Close price of the specific stock during a particular time period.

• Each candlestick represents one period of data.

• Easy to decipher and interpret the open, high, low and close positions of the stock.

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Software

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Candlestick PatternsCandle patterns

One candle pattern

Two candles pattern

Three candles pattern

Hammer Hanging Man Inverted Hammer Shooting Star

Bullish Engulfing Bearish Engulfing Piercing Dark Cloud Cover

Evening Star Morning Star Doji

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One Candle Patterns-Hammer and Hanging Man

• Long lower shadows and small real bodies.

Hammer Hanging Man28

Hammer and Hanging ManCriteria: The lower shadow should be at least two times the length of

the body. No or very small upper shadow. The real body is at the end of trading range. Colour – not much significant. Hammer- at the end of Downtrend.

Hanging man- near the end of Uptrend.

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• Long upper shadows and small real bodies.

Inverted Hammer & Shooting Star

Inverted Hammer Shooting Star

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Inverted Hammer & Shooting Star

Criteria: Upper Shadow at least twice of body. No or very small lower shadow. The real body is at the end of trading range. Colour – not much significant. Inverted Hammer- may be at the end of downtrend/uptrend.

Shooting star- at the end of uptrend Next day confirmation required.

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Two candles Pattern-Bullish Engulfing and Bearish Engulfing

• Two opposite coloured bodies.

• One coloured candlestick overshadowed by large opposite coloured candlestick.

Bullish Engulfing Bearish Engulfing32

Bullish Engulfing and Bearish Engulfing

Criteria: The candlestick body of previous day overshadowed by next

day’s candlestick. The colour of first candle is similar to previous one and body

of second candle is opposite in colour to first candle. Large volume on the engulfing day. Next day confirmation of reversal required. Bullish engulfing- end of downtrend Bearish engulfing- end of uptrend

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Piercing and Dark Cloud Cover

• Two opposite coloured candlesticks

• Next candlestick closes at least 50% of previous candlestick’s real body.

Piercing Pattern Dark Cloud Cover Pattern34

Piercing and Dark Cloud Cover

Criteria: Piercing: Opens lower than previous close; closes at least 50%

of previous real body. Dark Cloud Cover: Opens higher than previous close; closes at

least 50% of previous real body. Piercing : At the end of downtrend. Dark Cloud Cover: At the end of Uptrend.

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Three Candle Pattern-Evening Star and Morning Star

• Evening star : Formed by tall Green body candle followed by a small real body that gaps above the first real body to form a “star” and a third red candle that closes well into first session’s green real body.

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Evening Star and Morning Star

• Morning Star : Formed by tall Red body candle followed by a small real body that gaps above the first real body to form a “star” and a third Green candle that closes well into first session’s Red real body.

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Evening Star and Morning Star

Criteria: Evening Star- at end of Uptrend Morning Star- at end of Downtrend A gap between first and second session adds to probability of

reversal. Gap before and after the star day is more desirable.

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Doji• Same opening and closing price.

• Likelihood of a reversal increases if subsequent candlesticks confirm the doji’s reversal potential.

• Period of indecision.

Dragonfly Doji

Doji Cross Tombstone Doji

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Trend & Trendline• Trend refers to any repetitive action in price movement.

• Trendline refers to the direction and the speed of the price during a time series within a chart.

• Help in trend identification and confirmation.

• A trend line is a straight line that connects two or more price points and then extends into the future to act as a line of support or resistance

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Upward Trendline• Uptrend Line: An uptrend line has a positive slope and is

formed by connecting two or more low points.

• The second low must be higher than the first low.

• Uptrend lines act as support

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Upward Trendline

Software

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Downward Trendline• Downtrend line: A downtrend line has a negative slope and is

formed by connecting two or more high points.

• The second high must be lower than the first high.

• Downtrend lines act as resistance.

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Downward Trendline

Software

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Sideways• No higher top and No Lower Bottom are noticed during a

period.

• The price movements form same Top and same Bottom series.

Software

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Rules regarding Trendline• Requires atleast two points to draw a trendline.

• Third point confirms the validity

• At the time of trendline break, the volume should be high to be a valid breakout.

• The angle should be near to 45°

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Support & Resistance• Support: A support line refers to that level beyond which a

stock’s price may not fall.

• Horizontal floor where interest in buying a commodity is strong enough to overcome the pressure to sell.

Software

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• Resistance: Line beyond which a stock’s price may not increase.

• A resistance is a horizontal ceiling where the pressure to sell is greater than the pressure to buy

Software

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Support & Resistance

Changing of Polarity

Support can turn into resistance and vice versa.

Software

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SUPPORT

RESISTANCE

Gaps• A gap is an area on a price chart in which there were no trades.

• Normally this occurs after the close of the market on one day and the next day’s open.

• Gaps can be subdivided into four basic categories:– Common gap– Breakaway gap– Runaway/ Continuation gap– Exhaustion gap

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Common Gaps• Also referred as “a trading gap” or “an area gap”

• Usually uneventful

• Gap closes within few days

• Usually appears in a trading range or congestion area

Software

51 COMMON GAP

Breakaway Gaps• Breaking Out of the trading range or congestion area.

• Requires market enthusiasm

• Generally Higher Volume on the day of Breakout.

Software

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BREAKAWAY GAP

Runaway Gaps• Also called as “measuring gaps”

• Caused by increased interest in the stock

• Represents an almost panic state in traders

• Can be because of some news or events

Software

53 RUNAWAY GAP

Exhaustion Gaps• Occurs near the end of a good up or down trend.

• They are identified by high volume.

• Many times the first signal of the end of that trend.

Software

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EXHAUSTION GAP

Conclusion• Basics of Financial Markets

• Basic knowledge of Technical Analysis

• Overview of Fundamental Analysis

• Overview of Economic Analysis

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References• Summer Internship workings

• NSE- NCFM Technical Analysis Module

• NSE- NCFM Fundamental Analysis Module

• NSE- NCFM Economic Analysis Module

• Sharekhan- Trade Tiger Software

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Queries

Thank You!&

Happy Learning