“Technical analysis”

(Analysis of State Bank of India)

Rishikesh R KshirsagarMasters in Financial Services Management (M.F.S.M)

Academic Year – 2011-12

Under the Guidance of

Prof. Pankaj Bhattacharjee

University of Mumbai’sAlkesh Dinesh Mody Institute For 

Financial and Management Studies

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Declaration

I, Mr. Rishikesh Ravindra Kshirsagar TYMFSM Student of Alkesh Dinesh Mody Institute for Financial and Management Studies, hereby declare that I have completed the project titled Technical analysis of State Bank of India during the academic year 2011-2012.

The report work is original and the information/data included in the report is true to the best of my Knowledge. Due credit is extended on the work of Literature/Secondary Survey by endorsing it in the Bibliography as per prescribed format.

Signature of the Student with Date

Rishikesh Ravindra Kshirsagar

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University of Mumbai’sAlkesh Dinesh Mody Institute For 

Financial and Management Studies

Certificate

I, Professor Pankaj Bhattacharjee hereby certify that Mr. Rishikesh Ravindra Kshirsagar, TYMFSM Student of Alkesh Dinesh Mody Institute for Financial and Management Studies has completed a project titled Technical analysis of State Bank of India in the academic year 2011-2012. The work of the student is original and the information included in the project is true to the best of my Knowledge.

Signature of Guide with Date

Prof. Pankaj Bhattacharjee

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TABLE OF CONTENTS

S.NO. PARTICULARS PAGE NO.

1. Introduction 52. Technical analysis 83 Dow Theory 104 Drawbacks / limitations of technical analysis 155 Tools & Instruments in technical analysis 186 Chart Types 207 Trends In Technical Analysis 378 Why Volume Is Important 459 Chart Patterns 4810 Technical Indicators 7311 Technical analysis of “State Bank of India” 8712 Bibliography 95

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INTRODUCTION:-

WHAT’S THIS EQUITY ANALYSIS?

Professional investor will make more money & less loss than, who

let their heart rule. Their head eliminate all emotions for decision making.

Be ruthless & calculating, you are out to make money. Decision should

be based on actual movement of share price measured both in money &

percentage term & nothing else. Greed must be avoided

Patience may be a virtue, but impatience can frequently be

profitable.

In Equity Analysis anticipated growth, calculations are based on

considered FACTS & not on HOPE. Equity analysis is basically a

combination of two independent analyses, namely fundamental analysis

& Technical analysis. The subject of Equity analysis, i.e. the attempt to

determine future share price movement & its reliability by references to

historical data is a vast one, covering many aspect from the calculating

various FINANCIAL RATIOS, plotting of CHARTS to extremely

sophisticated indicators.

A general investor can apply the principles by using the simplest of

tools: pocket calculator, pencil, ruler, chart paper & your cautious mind,

watchful attention. It should be pointed out that, this equity analysis does

not discuss how to buy & sell shares, but does discuss a method which

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enables the investor to arrive at buying & selling decision. The financial

analysts always need yardsticks to evaluate the efficiency &

performances of any business unit at the time of investment. Fundamental

analysis is useful in long term investment decision. In Fundamental

analysis a company s goodwill,

It’s performances, liquidity, leverage, turnover, profitability & financial

health was checked & analysis with the help of ratio analysis for the

purpose of long term successful investment.

Technical analysis refers to the study of market generated data like

prices & volume to determine the future direction of prices movements.

Technical analysis mainly seeks to predict the short term price

travels. The focus of technical analysis is mainly on the internal market

data, i.e. prices & volume data. It appeals mainly to short term traders.

It is the oldest approach to equity investment dating back to the late

19th century.

Assumption’s for the Equity Analysis.

1. Works only in normal share-market conditions with great reliability, it

also works in abnormal share-market conditions, but with low reliability.

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2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY,

so the investment object has vital importance associated to return along

with risk.

3. Cash management gets the magnitude role, because the scenario of

equity analysis is revolving around the term money

4. Portfolio management, risk management was up to the investor s

knowledge.

5. Capital market trend is always a friend, whether it is short run or long

run.

6. You are buying stock & not companies, so don t are curious or panic to

do

Post-mortem of companies’ performances

7. History repeats: investors & speculators react the same way to the

same types of events homogeneously.

8. Capital market has a typical market psychology along with other issues

like; perceptions, the crowd Vs the individual, tradition s & trust.

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9. An individual perceptions about the investment return & associated

risk may differ from individual to individual.

10. Although the equity analysis is art as well as sciences so, it also has

some

Exceptions

EQUITY ANALYSIS

FUNDAMENTAL TECHNICAL

ANALYSIS ANALYSIS

Technical analysis:-

“Technical analysis refers to the study of market generated data

like prices & volume to determine the future direction of prices

movements.”

Technical analysis mainly seeks to predict the short term price

travels. It is important criteria for selecting the company to invest. It also

provides the base for decision-making in investment. The one of the most

frequently used yardstick to check & analyze underlying price progress.

For that matter a verity of tools was consider.

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This Technical analysis is helpful to general investor in many

ways. It provides important & vital information regarding the current

price position of the company.

Technical analysis involves the use of various methods for

charting, calculating & interpreting graph & chart to assess the

performances & status of the price. It is the tool of financial analysis,

which not only studies but also reflecting the numerical & graphical

relationship between the important financial factors.

The focus of technical analysis is mainly on the internal market

data, i.e. prices & volume data. It appeals mainly to short term traders. It

is the oldest approach to equity investment dating back to the late 19th

century.

It uses charts and computer programs to study the stock’s trading

volume and price movements in the hope of identifying a trend.

In fact the decision made on the basis of technical analysis is done only

After inferring a trend and judging the future movement of the stock on

the basis of the trend. Technical Analysis assumes that the market is

efficient and the price has already taken into consideration the other

factors related to the company and the industry. It is because of this

assumption that many think technical analysis is a tool, which is effective

for short-term investing.

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DOW THEORY:-

• Charles Dow who was editor of Wall Street Journal in

1900 is known for the most important theory developed by

him with technical indicators. In fact, the theory gained so

much significance that the theory was named after him.

• The Dow Theory has been further developed by other

technical analysts and it forms the basis of the technician’s

theory.

• The theory predicts trends in the market for individual and

total existing securities. It also shows reversals in stock

prices.

• According to ‘Dow theory’, the market always has three

movements and the movements are simultaneous in the

nature. These movements may be described as:-

• The narrow movement which occurs from day to day.

• The short swing which usually moves for short time like

two weeks and extends up to a month; this movement can

be called a short term movement, and

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The third movement is also the main movement and it

covers for years in its duration.

• According to the type of movements, they have been given

special names.

• The narrow movement is called ‘fluctuations’ the short

swing is better known as ‘secondary movements’ and the

main movement is also called the ‘primary trends’.

• Narrow movements are called ‘fluctuations’. Secondary

movements are those which last only for a short while and

they are also known as “corrections”. Primary trends are,

therefore, the main movement in the stock market. It is

also called ‘Bears” and ‘Bulls” market.

• According to the Dow Theory, the price movements in a

market can be identified by means of a line-chart.

• In this chart the technical analyst should plot the price of

the share. With it, he should also mark the market average

every day.

• This would help in identifying the primary and secondary

movements.

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• Dow theorists believe in ‘momentum’, which, according to

them, keeps the price moving in the same direction.

• They believe in primary trends, which according to them

are momentum or bear and bull markets. The momentum

will carry the prices further but momentum of primary

trend will be halted by the terminology used by technical

analysts called ‘support areas’ and ‘resistance areas’.

Criticism of Dow Theory

• The Dow Theory is subject to various limitations in actual

practice.

• Dow has developed this theory to depict the general trend

of the market but not with the intention of projecting the

future trend or to diagnose the buy and sell signals in the

market.

• These applications of the Dow Theory have come in the

light of analytical studies of financial analysts.

• This theory is criticized on the ground that it is too

subjective and based on historical interpretation; it is not

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infallible as it depends on the interpretative ability of the

analyst.

• The results of this theory do not also give meaningful and

conclusive evidence of any action to be taken in terms of

buy and sell operations.

Candlestick Charting

• The candle is comprised of two parts, the body and the

shadows. The body encompasses the open and closing

price for the period. The candle body is black if the

security closed below the open, and white if the close was

higher than the open for the period. The candlestick

shadow encompasses the intra period high and low.

History of Technical Analysis:

Technical Analysis as a tool of investment for the average investor

thrived in the late nineteenth century when Charles Dow, then editor of

the Wall Street Journal, proposed the Dow Theory. He recognized that

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the movement is caused by the action/reaction of the people dealing in

stocks rather than the news in itself.

Technical analysis 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. Just as there are many investment styles on the

fundamental side,

There are also many different types of technical traders. Some rely on

chart patterns; others use technical indicators and oscillators, and most

use some combination of the two. In any case, technical analysts'

exclusive use of historical price and volume data is what separates them

from their fundamental counterparts. Unlike fundamental analysts,

technical analysts don't care whether a stock is undervalued the only

thing that matters is a security's past trading data and what information

this data can provide about where the Security might move in the future.

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Basic premises of technical analysis:

1. Market prices are determined by the interaction of supply & demand

forces.

2. Supply & demand are influenced by variety of supply & demand

affiliated

Factors both rational & irrational

3. These include fundamental factors as well as psychological factors.

4. Barring minor deviations stock prices tend to move in fairly persistent

trends.

5. Shifts in demand & supply bring about change in trends.

6. This shift s can be detected with the help of charts of manual &

computerized action, because of the persistence of trends & patterns

analysis of past market data can be used to predict future prices

behaviours.

Drawbacks / limitations of technical analysis:

1. Technical analysis does not able to explain the rezones behind the

employment or selection of specific tool of Technical analysis.

2. The technical analysis failed to signal an uptrend or downtrend in time.

3. The technical analysis must be a self defeating proposition. As more &

more people use, employ it the value of such analysis trends to reduce.

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Why we use TECHNICAL ANALYSIS?

1) Technical analysis provides information on the best entry and

Exit points for a trade.

2) On a chart, the trader can see where momentum is rising, a

Trend is forming, a price is dipping or other events are developing that

show the best entry point and time for the most profitable trade. With the

constant movement of various currencies against each other in the Forex

market, most

Traders will focus on using technical indicators to find and place their

Trades

IS TECHNICAL ANALYSIS DIFFICULT?

1) Technical analysis is not difficult, but it requires studying

Different types of charts such as the hourly or daily charts, knowing

which technical indicators to use and how to use them.

2) Computers and the Internet have made this process much easier.

Most brokers provide basic charts and technical indicators for free or at a

very low cost.

3) One way to avoid getting frustrated by all the lines, colours, and

Graphics is to focus on using only a few indicators that will

Provide you with the information needed. Try not to clutter your

Chart with too much information.

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Fundamental vs. Technical Analysis

Technical analysis and fundamental analysis are the two main

schools of thought in the financial markets. As we've mentioned,

technical analysis looks at the price movement of a security and uses this

data to predict its future price movements. Fundamental analysis, on the

other hand, looks at economic factors, known as fundamentals.

Fundamental analysis takes a relatively long-term approach

to analyzing the market compared to technical analysis. While

technical analysis can be used on a timeframe of weeks, days or

even minutes, fundamental analysis often looks at data over a

number of years.

The future can be found in the past

If prices are based on investor expectations, then knowing what a

security should sell for (i.e., fundamental analysis) becomes less

important than knowing what other investors expect it to sell for. That's

not to say that knowing what a security should sell for isn't important--it

is. But there is usually a fairly strong consensus of a stock's future

earnings that the average investor cannot disprove.

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Technical analysis is the process of analyzing a security's historical

prices in an effort to determine probable future prices. This is done by

comparing current price action (i.e., current expectations) with

comparable historical price action to predict a reasonable outcome. The

devout technician might define this process as the fact that history repeats

itself while others would suffice to say that we should learn from the past.

Usually the following tools & instruments are used to

do the technical analysis:

Price Fields

Technical analysis is based almost entirely on the analysis of price and

volume. The fields which define a security's price and volume are

explained below.

Open - This is the price of the first trade for the period (e.g., the first

trade of the day). When analyzing daily data, the Open is especially

important as it is the consensus price after all interested parties were able

to "sleep on it."

High - This is the highest price that the security traded during the period.

It is the point at which there were more sellers than buyers (i.e., there are

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always sellers willing to sell at higher prices, but the High represents the

highest price buyers were willing to pay).

Low - This is the lowest price that the security traded during the period.

It is the point at which there were more buyers than sellers (i.e., there are

always buyers willing to buy at lower prices, but the Low represents the

lowest price sellers were willing to accept).

Close - This is the last price that the security traded during the period.

Due to its availability, the Close is the most often used price for analysis.

The relationship between the Open (the first price) and the Close (the last

price) are considered significant by most technicians. This relationship is

emphasized in candlestick charts.

Volume - This is the number of shares (or contracts) that were traded

during the period. The relationship between prices and volume (e.g.,

increasing prices accompanied with increasing volume) is important.

Open Interest - This is the total number of outstanding contracts (i.e.,

those that have not been exercised, closed, or expired) of a future or

option. Open interest is often used as an indicator.

Bid - This is the price a market maker is willing to pay for a security

(i.e., the price you will receive if you sell).

Ask - This is the price a market maker is willing to accept (i.e., the price

you will pay to buy the security).

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Price Styles (Charts Types)

Price in a chart can be displayed in four styles:

1. Bar Chart.

2. Line Chart.

3. Candlestick Chart.

4. Point and Figure Charts

1) Bar Charts :

The highs and lows of a foreign currency are plotted in a diagram and the

points are joined with vertical lines (bars). A small horizontal tick to the

left denotes the opening level while a small horizontal tick to the right

represents the closing price of each interval.

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2) Line Chart.

It gives the detailed information about every aspect.

The exchange rates for each time period are plotted in a diagram and the

points are joined. Prices on the y-axis, time on the x-axis.

The line chart chooses for example the closing price of consecutive time

periods, but can also work with daily, official fixings.

The relatively easy handling of line charts is a great advantage. Line

charts do not show price movements within a time period. This can be a

problem because important information for exchange rate analysis can be

lost. This Problem was remedied with the development of bar charts that

represent a more sophisticated form of line chart.

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3) Candlestick Chart.

A candlestick is black if the closing price is lower than the opening price.

A candlestick is white if the closing price is higher than the opening

price.

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In the 1600s, the Japanese developed a method of technical analysis to

analyze the price of rice contracts. This technique is called candlestick

charting. Steven Nison is credited with popularizing candlestick charting

and has become recognized as the leading expert on their interpretation.

Candlestick charts display the open, high, low, and closing prices in a

format similar to a modern-day bar chart, but in a manner that extenuates

the relationship between the opening and closing prices. Candlestick

Charts are simply a new way of looking at prices, they don't involve any

calculations. Because candlesticks display the relationship between the

open, high, low, and closing prices, they cannot be displayed on securities

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that only have closing prices, nor were they intended to be displayed on

securities that lack opening prices.

The interpretation of candlestick charts is based primarily on patterns.

The most popular patterns are explained below.

Bullish Patterns

1) Long white (empty) line. This is a bullish line. It occurs when

prices open near the low and close significantly higher near the

period's high.

2) Hammer. This is a bullish line if it occurs after a significant

downtrend. If the line occurs after a significant up-trend, it is called

a Hanging Man. A Hammer is identified by a small real body (i.e.,

a small range between the open and closing prices) and a long

lower shadow (i.e., the low is significantly lower than the open,

high, and lose). The body can be empty or filled-in.

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3) Piercing line. This is a bullish pattern and the opposite of a dark

cloud cover. The first line is a long black line and the second line is

a long white line. The second line opens lower than the first line's

low, but it closes more than halfway above the first line's real body.

4) Bullish engulfing lines. This pattern is strongly bullish if it occurs

after a significant downtrend (i.e., it acts as a reversal pattern). It

occurs when a small bearish (filled-in) line is engulfed by a large

bullish (empty) line.

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5) Morning star. This is a bullish pattern signifying a potential

bottom. The "star" indicates a possible reversal and the bullish

(empty) line confirms this. The star can be empty or filled-in.

6) Bullish doji star. A "star" indicates a reversal and a doji indicates

indecision. Thus, this pattern usually indicates a reversal following

an indecisive period. You should wait for a confirmation (e.g., as in

the morning star, above) before trading a doji star. The first line

can be empty or filled in.

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Bearish Patterns

1) Long black (filled-in) line. This is a bearish line. It occurs when

prices open near the high and close significantly lower near the

period's low.

2) Hanging Man. These lines are bearish if they occur after a

significant uptrend. If this pattern occurs after a significant

downtrend, it is called a Hammer. They are identified by small real

bodies (i.e., a small range between the open and closing prices) and

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a long lower shadow (i.e., the low was significantly lower than the

open, high, and close). The bodies can be empty or filled-in.

3) Dark cloud cover. This is a bearish pattern. The pattern is more

significant if the second line's body is below the centre of the

previous line's body (as illustrated).

4) Bearish engulfing lines. This pattern is strongly bearish if it

occurs after a significant uptrend (i.e., it acts as a reversal pattern).

It occurs when a small bullish (empty) line is engulfed by a large

bearish (filled-in) line.

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5) Evening star. This is a bearish pattern signifying a potential top.

The "star" indicates a possible reversal and the bearish (filled-in) line

confirms this. The star can be empty or filled in.

6) Doji star. A star indicates a reversal and a doji indicates indecision.

Thus, this pattern usually indicates a reversal following an indecisive

period. You should wait for a confirmation (e.g., as in the evening star

illustration) before trading a doji star.

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7) Shooting star. This pattern suggests a minor reversal when it

appears after a rally. The star's body must appear near the low price

and the line should have a long upper shadow.

Reversal Patterns

1) Long-legged doji. This line often signifies a turning point. It occurs

when the open and close are the same, and the range between the high

and low is relatively large.

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2) Dragon-fly doji. This line also signifies a turning point. It occurs

when the open and close are the same, and the low is significantly

lower than the open, high, and closing prices.

3) Gravestone doji. This line also signifies a turning point. It occurs

when the open, close, and low are the same, and the high is

significantly higher than the open, low, and closing prices.

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4) Star. Stars indicate reversals. A star is a line with a small real body

that occurs after a line with a much larger real body, where the real

bodies do not overlap. The shadows may overlap.

5) Doji star. A star indicates a reversal and a doji indicates indecision.

Thus, this pattern usually indicates a reversal following an indecisive

period. You should wait for a confirmation (e.g., as in the evening star

illustration) before trading a doji star.

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Neutral Patterns

1) Spinning tops. These are neutral lines. They occur when the

distance between the high and low, and the distance between the

open and close, are relatively small.

2) Doji. This line implies indecision. The security opened and

closed at the same price. These lines can appear in several

different patterns. Double doji lines (two adjacent doji lines)

imply that a forceful move will follow a breakout from the

current indecision.

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4) Point And Figure Charts

The point and figure chart is not well known or used by the

average investor but it has had a long history of use dating back to the

first technical traders. This type of chart reflects price movements and is

not as concerned about time and volume in the formulation of the points.

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The point and figure chart removes the noise, or insignificant price

movements, in the stock, which can distort traders' views of the price

trends. These types of charts also try to neutralize the skewing effect that

time has on chart analysis.

When first looking at a point and figure chart, you will notice a series of

Xs and Os. The Xs represent upward price trends and the Os represent

downward price trends. There are also numbers and letters in the chart;

these represent months, and give investors an idea of the date. Each box

on the chart represents the price scale, which adjusts depending on the

price of the stock: the higher the stock's price the more each box

represents. On most charts where the price is between $20 and $100, a

box represents $1, or 1 point for the stock. The other critical point of a

point and figure chart is the reversal criteria. This is usually set at three

but it can also be set according to the chartist's discretion. The reversal

criteria set how much the price has to move away from the high or low in

the price trend to create a new trend or, in other words, how much the

price has to move in order for a column of Xs to become a column of Os,

or vice versa. When the price trend has moved from one trend to another,

it shifts to the right, signalling a trend change.

Summary of charts

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TRENDS IN TECHNICAL ANALYSIS

The Use of Trends

One of the most important concepts in technical analysis is that of

trend. The meaning in finance isn't all that different from the

general definition of the term - a trend is really nothing more than

the general direction in which a security or market is headed. Take

a look at the chart below:

Isn’t it hard to see that the trend is up? However, it's not always

this easy to see a trend:

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There are lots of ups and downs in this chart, but there isn't a clear

indication of which direction this security is headed.

A More Formal Definition

Unfortunately, trends are not always easy to see. In other

words, defining a trend goes well beyond the obvious. In any

given chart, you will probably notice that prices do not tend to

move in a straight line in any direction, but rather in a series

of highs and lows. In technical analysis, it is the movement of

the highs and lows that constitutes a trend. For example,

an uptrend is classified as a series of higher highs and higher

lows, while a downtrend is one of lower lows and lower highs.

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 It is an example of an uptrend. Point 2 in the chart is the first high, which

is determined after the price falls from this point. Point 3 is the low that is

established as the price falls from the high. For this to remain an uptrend

each successive low must not fall below the previous lowest point or the

trend is deemed a reversal.

Types of Trend

There are three types of trend:

1. Uptrend

2. Downtrend

3. Sideways/Horizontal Trends

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As the names imply, when each successive peak and trough is

higher, it's referred to as an upward trend. If the peaks and troughs are

getting lower, it's a downtrend. When there is little movement up or

down in the peaks and troughs, it's a sideways or horizontal trend. If you

want to get really technical, you might even say that a sideways trend is

actually not a trend on its own, but a lack of a well-defined trend in either

direction. In any case, the market can really only trend in these three

ways: up, down or nowhere.

Trend Lengths

Along with these three trend directions, there are three trend classifications. A trend

of any direction can be classified as a long-term trend, intermediate trend or a short-

term trend. In terms of the stock market, a major trend is generally categorized as

one lasting longer than a year. An intermediate trend is considered to last between

one and three months and a near-term trend is anything less than a month. A long-

term trend is composed of several intermediate trends, which often move against

the direction of the major trend. If the major trend is upward and there is a

downward correction in price movement followed by a continuation of the uptrend,

the correction is considered to be an intermediate trend. The short-term trends are

components of both major and intermediate trends. Take a look a Figure 4 to get a

sense of how these three trend lengths might look.

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When analyzing trends, it is important that the chart is constructed

to best reflect the type of trend being analyzed. To help identify

long-term trends, weekly charts or daily charts spanning a five-

year period are used by chartists to get a better idea of the long-

term trend. Daily data charts are best used when analyzing both

intermediate and short-term trends. It is also important to

remember that the longer the trend, the more important it is; for

example, a one-month trend is not as significant as a five-year

trend.

Trend Lines

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A trend line is a simple charting technique that adds a line to

a chart to represent the trend in the market or a stock. Drawing a

trend line is as simple as drawing a straight line that follows a

general trend. These lines are used to clearly show the trend and

are also used in the identification of trend reversals.

An upward trend line is drawn at the lows of an upward

trend. This line represents the support the stock has every time

it moves from a high to a low. Notice how the price is propped up

by this support. This type of trend line helps traders to anticipate

the point at which a stock's price will begin moving upwards again.

Similarly, a downward trend line is drawn at the highs of the

downward trend. This line represents the resistance level that a

stock faces every time the price moves from a low to a high.

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Channels

A channel, or channel lines, is the addition of two

parallel trend lines that act as strong areas of support and

resistance. The upper trend line connects a series of highs,

while the lower trend line connects a series of lows. A channel

can slope upward, downward or sideways but, regardless of

the direction, the interpretation remains the same. Traders will

expect a given security to trade between the two levels of

support and resistance until it breaks beyond one of the levels,

in which case traders can expect a sharp move in the direction

of the break. Along with clearly displaying the trend, channels

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are mainly used to illustrate important areas of support and

resistance.

A descending channel on a stock chart; the upper trend line has

been placed on the highs and the lower trend line is on the lows.

The price has bounced off of these lines several times, and has

remained range-bound for several months. As long as the price

does not fall below the lower line or move beyond the upper

resistance, the range-bound downtrend is expected to continue.

The Importance of Trend

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It is important to be able to understand and identify trends so that

you can trade with rather than against them. Two important sayings in

technical analysis are "the trend is your friend" and "don't buck the

trend," illustrating how important trend analysis is for technical traders

IMPORTANCE OF VOLUME:-

What Is 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 can usually 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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Why Volume Is Important?

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 weak

volume. 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

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is below average, there may not be enough conviction to support a

true trend reversal. 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

the trend. 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 and may soon end. When volume

tells a different story, it is a case of divergence, which refers to a

contradiction between two different indicators. The simplest

example of divergence is a clear upward trend on declining

volume.

Volume and Chart Patterns

The other use of volume is to confirm chart patterns.

Patterns such as head and shoulders, triangles, flags and other price

patterns can be confirmed with volume, a process which we'll

describe in more detail later in this tutorial. 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

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confirm the pivotal moments of a chart pattern, the quality of the

signal formed by the pattern is weakened.

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 a sign that the upward run is about

to end. Now that we have a better understanding of some of the important

factors of technical analysis, we can move on to charts, which help to

identify trading opportunities in prices movements.

CHART PATTERNS:-

A chart pattern is a distinct formation on a stock chart that

creates a trading signal, or a sign of future price movements. Chartists

use these patterns to identify current trends and trend reversals and to

trigger buy and sell signals.

In the first section of this tutorial, we talked about the three

assumptions of technical analysis, the third of which was that in technical

analysis, history repeats itself. The theory behind chart patterns is based

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on this assumption. The idea is that certain patterns are seen many times,

and that these patterns signal a certain high probability move in a stock.

Based on the historic trend of a chart pattern setting up a certain price

movement, chartists look for these Patterns to identify trading

opportunities. While there are general ideas and components to every

chart pattern, there is no chart pattern that will tell you with 100%

certainty where a security is headed. This creates some leeway and

debate as to what a good pattern looks like, and is a major reason why

charting is often seen as more of an art than a science. There are two

types of patterns within this area of technical analysis, reversal and

continuation. A reversal pattern signals that a prior trend will reverse

upon completion of the pattern. A continuation pattern, on the other hand,

signals that a trend will continue once the pattern is complete. These

patterns can be found over charts of any timeframe. In this section, we

will review some of the more popular chart patterns.

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1. Head And Shoulders

This is one of the most popular and reliable chart patterns in

technical analysis. Head and shoulders is a reversal chart pattern that

when formed, signals that the security is likely to move against the

previous trend. As you can see, there are two versions of the head and

shoulders chart pattern. Head and shoulders top (shown on the left) is a

chart pattern that is formed at the high of an upward movement and

signals that the upward trend is about to end. Head and shoulders bottom,

also known as inverse head and shoulders (shown on the right) is the

lesser known of the two, but is used to signal a reversal in a downtrend.

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___________________________________________________________

___

Both of these head and shoulders patterns are similar in that there are

four main parts: two shoulders, a head and a neckline. Also, each

individual head and shoulder is comprised of a high and a low. For

example, in the head and shoulders top image shown on the left side, the

left shoulder is made up of a high followed by a low. In this pattern, the

neckline is a level of support or resistance. Remember that an upward

trend is a period of successive rising highs and rising lows. The head and

shoulders chart pattern, therefore, illustrates a weakening in a trend by

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showing the deterioration in the successive movements of the highs and

lows.

2. Cup and Handle

a cup and handle chart is a bullish continuation pattern in which the

upward trend has paused but will continue in an upward direction once

the pattern is confirmed.

The price pattern forms what looks like a cup, which is preceded by an

upward trend. The handle follows the cup formation and is formed by a

generally downward/sideways movement in the security's price. Once the

price movement pushes above the resistance lines formed in the handle,

the upward trend can continue.

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3. Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend

reversal - it is considered to be one of the most reliable and is commonly

used. These patterns are formed after a sustained trend and signal to

chartists that the trend is about to reverse. The pattern is created when a

price movement tests support or resistance levels twice and is unable to

break through. This pattern is often used to signal intermediate and long-

term trend reversals.

 

A double top pattern is shown on the left, while a double bottom

pattern is shown on the right. In the case of the double top pattern, the

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price movement has twice tried to move above a certain price level. After

two unsuccessful attempts at pushing the price higher, the trend reverses

and the price heads lower. In the case of a double bottom (shown on the

right), the price movement has tried to go lower twice, but has found

support each time. After the second bounce off of the support, the

security enters a new trend and heads upward.

4. Triangles

Triangles are some of the most well-known chart patterns used in technical analysis.

The three types of triangles, which vary in construct and implication, are the

symmetrical triangle, ascending and descending triangle. These chart patterns are

considered to last anywhere from a couple of weeks to several months.

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The symmetrical is a pattern in which two trend lines converge toward

each other. This pattern is neutral in that a breakout to the upside or

downside is a confirmation of a trend in that direction. In an ascending

triangle, the upper trend line is flat, while the bottom trend line is upward

sloping. This is generally thought of as a bullish pattern in which

chartists look for an upside breakout. In a descending triangle, the lower

trend line is flat and the upper trend line is descending. This is generally

seen as a bearish pattern where chartists look for a downside breakout.

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5. Flag and Pennants

These two short-term chart patterns are continuation patterns that

are formed when there is a sharp price movement followed by

a   generally sideways price movement. This pattern is then completed

upon another sharp price movement in the same direction as the

move that started the trend. The patterns are generally thought to

last from one to three weeks.

There is little difference between a pennant and a flag. The main

difference between these price movements can be seen in the middle

section of the chart pattern. In a pennant, the middle section is

characterized by converging trend lines, much like what is seen in a

symmetrical triangle. The middle section on the flag pattern, on the other

hand, shows a channel pattern, with no convergence between the trend

lines. In both cases, the trend is expected to continue when the price

moves above the upper trend line

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6. Triple Tops and Bottoms

Triple tops   and   triple bottoms are another type of reversal chart

pattern in chart analysis. These are not as prevalent in charts as

head and shoulders and double tops and bottoms, but they act in a

similar fashion. These two chart patterns are formed when the price

movement tests a level of support or resistance three times and is

unable to break through; this signals a reversal of the prior trend.

Confusion can form with triple tops and bottoms during the formation of

the pattern because they can look similar to other chart patterns. After the

first two support/resistance tests are formed in the price movement, the

pattern will look like a double top or bottom, which could lead a chartist

to enter a reversal position too soon.

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7. Rounding Bottom

a rounding bottom, also referred to as a saucer bottom, is a long-term

reversal pattern that signals a shift from a downward trend to an upward

trend. This pattern is traditionally thought to last anywhere from several

Months to several years.

A rounding bottom chart pattern looks similar to a cup and handle pattern

but without the handle. The long-term nature of this pattern and the lack

of a confirmation trigger, such as the handle in the cup and handle, make

it a difficult pattern.

SUPPORT AND RESISTANCE:-

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Once you understand the concept of a trend, the next major concept is that of

support and resistance. You'll often hear technical analysts talk about the ongoing battle

between the bulls and the bears, or the struggle between buyers (demand) and sellers

(supply). This is revealed by the prices a security seldom moves above (resistance) or below

(support).

Support is the price level through which a stock or market seldom falls

(illustrated by the blue arrows). Resistance, on the other hand, is the price

level that a stock or market seldom surpasses (illustrated by the Red

Arrows).

These support and resistance levels are seen as important in terms

of market psychology and supply and demand. Support and resistance

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levels are the levels at which a lot of traders are willing to buy the stock

(in the case of a support) or sell it (in the case of resistance). When these

trend lines are broken, the supply and demand and the psychology behind

the stock's movements is thought to have shifted, in which case new

levels of support and resistance likely be established.

Role Reversal

Once a resistance or support level is broken, its role is

reversed. If the price falls below a support level, that level will

become resistance. If the price rises above a resistance level, it will

often become support. As the price moves past a level of support or

resistance, it is thought that supply and demand has shifted, causing

the breached level to reverse its role. For a true reversal to occur,

however, it is important that the price make a strong move through

either the support or resistance.

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For example, as you can see, the dotted line is shown as a level of resistance

that has prevented the price from heading higher on two previous occasions (Points

1 and 2). However, once the resistance is broken, it becomes a level of support

(shown by Points 3 and 4) by propping up the price and preventing it from heading

lower again.

Many traders who begin using technical analysis find this concept hard to believe

and don't realize that this phenomenon occurs rather frequently, even with some of

the most well-known companies. For example, this phenomenon is evident on the

Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice how the role of

the $51 level changes from a strong level of support to a level of resistance.

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In almost every case, a stock will have both a level of support and

a level of resistance and will trade in this range as it bounces

between these levels.

The 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.

Support and resistance levels both test and confirm trends and

need to be monitored by anyone who uses technical analysis. As long as

the price of the share remains between these levels of support and

resistance, the trend is likely to continue. It is important to note, however,

that a break beyond a level of support or resistance does not always have

to be a reversal.

For example, if prices moved above the resistance levels of an

upward trending channel, the trend have accelerated, not reversed. This

means that the price appreciation is expected to be faster than it was in

the channel.

Being aware of these important support and resistance points should

affect the way that you trade a stock. Traders should avoid placing orders

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at these major points, as the area around them is usually marked by a lot

of volatility. If you feel confident about making a trade near a support or

resistance level, it is important that you follow this simple rule: do not

place orders directly at the support or resistance level. This is because in

many cases, the price never actually reaches the whole number, but flirts

with it instead. So if you're bullish on a stock that is moving toward an

important support level, do not place the trade at the support level.

Instead, place it above the support level, but within a few points. On the

other hand, if you are placing stops or short selling, set up your trade

price at or below the level of support.

MOVING AVERAGES:-

Most chart patterns show a lot of variation in price

movement. This can make it difficult for traders to get an idea of a

security's overall trend. One simple method traders use to combat

this is to apply moving averages. A moving average is the average

price of a security over a set amount of time. By plotting a

security's average price, the price movement is smoothed out.

Once the day-to-day fluctuations are removed, traders are better

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able to identify the true trend and increase the probability that it

will work in their favour.

Types of Moving Averages: -

There are a number of different types of moving averages that

vary in the way they are calculated, but how each average is interpreted

remains the same. The calculations only differ in regards to the weighting

that they place on the price data, shifting from equal weighting of each

price point to more weight being placed on recent data. The three most

common types of moving averages are simple, linear and exponential.

1. Simple Moving Average (SMA)

This is the most common method used to calculate the moving

average of prices. It simply takes the sum of all of the past closing prices

over the time period and divides the result by the number of prices used

in the calculation. For example, in a 10-day moving average, the last 10

closing prices are added together and then divided by 10. As you can see

in Figure 1, a trader is able to make the average less responsive to

changing prices by increasing the number of periods used in the

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calculation. Increasing the number of time periods in the calculation is

one of the best ways to gauge the strength of the long-term trend and the

likelihood that it will reverse.

Many individuals argue that the usefulness of this type of

average is limited because each point in the data series has

the same impact on the result regardless of where it occurs

in the sequence. The critics argue that the most recent data is

more important and, therefore, it should also have a higher

weighting. This type of criticism has been one of the main

factors leading to the invention of other forms of moving

averages.

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2. Linear Weighted Average

This moving average indicator is the least common out of the

three and is used to address the problem of the equal weighting. The

linear weighted moving average is calculated by taking the sum of all the

closing prices over a certain time period and multiplying them by the

position of the data point and then dividing by the sum of the number of

periods. For example, in a five-day linear weighted average, today's

closing price is multiplied by five; yesterday's by four and so on until the

first day in the period range is reached. These numbers are then added

together and divided by the sum of the multipliers.

3. Exponential Moving Average (EMA)

This moving average calculation uses a smoothing factor to place a higher weight

on recent data points and is regarded as much more efficient than the linear weighted

average. Having an understanding of the calculation is not generally required for most

traders because most charting packages do the calculation for you. The most important

thing to remember about the exponential moving average is that it is more responsive to

new information relative to the simple moving average. This responsiveness is one of the key

factors of why this is the moving average of choice among many technical traders. A 15-

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period EMA raises and falls faster than a 15-period SMA. This slight difference doesn’t seem

like much, but it is an important factor to be aware of since it can affect returns.

Major Uses of Moving Averages

Moving averages are used to identify current trends and trend

reversals as well as to set up support and resistance levels. Moving

averages can be used to quickly identify whether a security is moving

in an uptrend or a downtrend depending on the direction of the

moving average. When a moving average is heading upward and the

price is above it, the security is in an uptrend. Conversely, a

downward sloping moving average with the price below can be used

to signal a downtrend.

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Another method of determining momentum is to look at the order of a

pair of moving averages. When a short-term average is above a longer-

term average, the trend is up. On the other hand, a long-term average

above a shorter-term average signals a downward movement in the trend.

Moving average trend reversals are formed in two main ways:

when the price moves through a moving average and when it moves

through moving average crossovers. The first common signal is when

the price moves through an important moving average. For example,

when the price of a security that was in an uptrend falls below a 50-

period moving average, it is a sign that the uptrend may be

reversing.

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The other signal of a trend reversal is when one moving average

crosses through another. For example, if the 15-day moving average

crosses above the 50-day moving average, it is a positive sign that the

price will start to increase.

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If the periods used in the calculation are relatively short, for example

15 and 35, this could signal a short-term trend reversal. On the other

hand, when two averages with relatively long time frames cross over

(50 and 200, for example), this is used to suggest a long-term shift in

trend.

Another major way moving averages are used is to identify support

and resistance levels. It is not uncommon to see a stock that has been

falling stop its decline and reverse direction once it hits the support

of a major moving average. A move through a major moving average

is often used as a signal by technical traders that the trend is

reversing. For example, if the price breaks through the 200-day

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moving average in a downward direction, it is a signal that the

uptrend is reversing.

Moving averages are a powerful tool for analyzing the trend in a security.

They provide useful support and resistance points and are very easy to

use. The most common time frames that are used when creating moving

averages are the 200-day, 100-day, 50-day, 20-day and 10-day. The 200-

day average is thought to be a good measure of a trading year, a 100-day

average of a half a year, a 50-day average of a quarter of a year, a 20-day

average of a month And 10 – day average of two weeks. Moving

averages help technical traders smooth out some of the noise that is found

in day-to-day price movements, giving traders a clearer view of the price

trend. So far we have been focused on price movement, through charts

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and averages. In the next section, we'll look at some other techniques

used to confirm price movement and patterns.

Technical Indicators

BOLLINGER BANDS

Overview

Bollinger Bands are similar to moving average envelopes. The

difference between Bollinger Bands and envelopes is envelopes are

plotted at a fixed percentage above and below a moving average, whereas

Bollinger Bands are plotted at standard deviation levels above and below

a moving average. Since standard deviation is a measure of volatility, the

bands are self-adjusting: widening during volatile markets and

contracting during calmer periods.

Bollinger Bands were created by John Bollinger.

Interpretation

Bollinger Bands are usually displayed on top of security prices,

but they can be displayed on an indicator. These comments refer to bands

displayed on prices. As with moving average envelopes, the basic

interpretation of Bollinger Bands is that prices tend to stay within the

upper- and lower-band. The distinctive characteristic of Bollinger Bands

is that the spacing between the bands varies based on the volatility of the

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prices. During periods of extreme price changes (i.e., high volatility), the

bands widen to become more forgiving. During periods of stagnant

pricing (i.e., low volatility), the bands

Narrow to contain prices.

Following are characteristics of Bollinger Bands.

• Sharp price changes tend to occur after the bands tighten, as volatility

lessens.

• When prices move outside the bands, a continuation of the current trend

is implied

• Bottoms and tops made outside the bands followed by bottoms and tops

made inside the bands call for reversals in the trend.

• A move that originates at one band tends to go all the way to the other

band. This observation is useful when projecting price targets.

MACD

Overview

The MACD ("Moving Average Convergence/Divergence") is a trend

following momentum indicator that shows the relationship between two

moving averages of prices. The MACD was developed by Gerald Appel,

publisher of Systems and Forecasts. The MACD is the difference

between a 26-day and 12-day exponential moving average. A 9-day

exponential moving average, called the "signal" (or "trigger") line is

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plotted on top of the MACD to show buy/sell opportunities. (Apple

specifies exponential moving averages as percentages. Thus, he refers to

these three moving averages as 7.5%, 15

and 20% respectively.)

Interpretation

The MACD proves most effective in wide-swinging trading markets.

There are three popular ways to use the MACD: crossovers,

overbought/oversold conditions, and divergences.

Crossovers

The basic MACD trading rule is to sell when the MACD falls below its

signal line. Similarly, a buy signal occurs when the MACD rises above its

signal line. It is also popular to buy/sell when the MACD goes

above/below zero.

Overbought/Oversold Conditions

The MACD is also useful as an overbought/oversold indicator. When the

shorter moving average pulls away dramatically from the longer moving

average (i.e., the MACD rises), it is likely that the security price is

overextending and will soon return to more realistic levels. MACD

overbought and oversold conditions exist vary from security to security.

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Divergences

An indication that an end to the current trend may be near occurs when

the MACD diverges from the security. A bearish divergence occurs when

the MACD is making new lows while prices fail to reach new lows. A

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 overbought/oversold levels.

MOMENTUM

Overview

The Momentum indicator measures the amount that a security's price has

changed over a given time span.

Interpretation

The interpretation of the Momentum indicator is identical to the

interpretation of the Price ROC. Both indicators display the rate-of-

change of a security's price. However, the Price ROC indicator displays

the rate-of-change as a percentage whereas the Momentum indicator

displays the rate-of-change as a ratio.

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VOLUME

Overview

Volume is simply the number of shares (or contracts) traded

during a specified time frame (e.g., hour, day, week, month, etc). The

analysis of volume is a basic yet very important element of technical

analysis. Volume provides clues as to the intensity of a given price move.

Interpretation

Low volume levels are characteristic of the indecisive expectations

that typically occur during consolidation periods (i.e., periods where

prices move sideways in a trading range). Low volume also often occurs

during the indecisive period during market bottoms. High volume levels

are characteristic of market tops when there is a strong consensus that

Prices will move higher. High volume levels are also very common at the

beginning of new trends (i.e., when prices break out of a trading range).

Just before market bottoms, volume will often increase due to panic-

driven selling.

Volume can help determine the health of an existing trend. A healthy up-

trend should have higher volume on the upward legs of the trend, and

lower volume on the downward (corrective) legs. A healthy downtrend

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usually has higher volume on the downward legs of the trend and lower

volume on the upward (corrective) legs.

RATE OF CHANGE (ROC)

Rate of change measures the rate at which prices rise or fall.

It is based on the principle that prices usually rise and fall at the fastest

pace well ahead of their peak and before their trough respectively.

10 – Day ROC

The concept of ROC can be explained with the help of a single example. A ball thrown into

the Air generally shoots up with speed but subsequently shows down considerably before it

turns to come down again. The loss of upward momentum that occurs before the ball

changes course can be seen in the stock market also. Before peaking out, share process

registers a noticeable decrease in momentum.

THE CALCULATION OF 10 DAY RATE OF CHANGE

DAY SHARE PRICE

SHARE PRICE 10DAYS AGO

ROC 10 DAYS AGO

1 2 3 (4) =(2)/(3)1 2079.5 2 2065.05 3 2106.05 4 2165.2 5 2151.1 6 2178.1 7 2189.35 8 2160 9 2125 10 2197 11 2247.95 2079.5 1.08112 2343 2065.05 1.13513 2421.35 2106.05 1.15014 2448 2165.2 1.13115 2252.95 2151.1 1.047

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16 2270 2178.1 1.04217 2205.15 2189.35 1.00718 2119 2160 0.98119 2229.95 2125 1.04920 2250.5 2197 1.02421 2206 2247.95 0.98122 2242.2 2343 0.95723 2167 2421.35 0.89524 2148.65 2448 0.87825 2151 2252.95 0.95526 2240.05 2270 0.98727 2309.25 2205.15 1.04728 2328.6 2119 1.09929 2357.7 2229.95 1.05730 2292 2250.5 1.018

The concept of ROC can be explained with the help of a single example.

A ball thrown into the air generally shoots up with speed but

subsequently shows down considerably before it turns to come down

again. The loss of upward momentum that occurs before the ball changes

course can be seen in the stock market also. Before peaking out, share

process registers a noticeable decrease in momentum. To measure the rate

of change, the ratio of the most recent closing price to the price for a

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certain number of days in the past is worked out. To calculate a 10 days

ROC, the latest closing price is divided by the closing price of the scrip

10 days ago. If the latest price is higher than that of the historical price for

the ten previous days, the ROC value will be above the line 1 and vice

versa. In the following table an example of 10 days ROC is explained.

Under column 2 the share price movement of a company is provided for

20 days while under column 3 the prices ruling 10 days ago has been

taken.

In the last column, the ROC values are arrived at by dividing the current

day’s price by the price 10 days ago.

The ROC values are available from the 11th day only as for the first 10

trading days. The 10 days back share prices are not available. It is worth

noting that the share prices are available only on the trading that actually

took place in the market.

Therefore, the ROC is computed for 10 trading days and not 10 calendar

days.

The share price has been increased by Re. 1 on every day trading day

from day 1 to day 15. However, the ROC declined continuously from

the 11th day to 15th day, though the share price in rupees terms increased.

This indicates that though there was a share price rise in absolute terms,

in percentage terms the rise in share price declined during that period.

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If the ROC line is above 1; the current day price is higher than

that of 10 days ago.

If the ROC line is above 1 and rising; the difference between the

current day price and 10 days back price grows at an increasing

rate (bullish signal).

If ROC line is above 1, but declining; the price rises at a lower

rate than the earlier growth rate (bearish signal)

If the ROC line is below 1, the current day’s price is lower than

the price 10 days ago.

If the ROC line is below 1 and falling, the difference between 10

days price and 10 days back price grows at a faster rate (bearish

signal).

If the ROC line is below 1, but rising, the rate of decline slows

down (bullish signal).

The ROC line is so constructed that it is always a step ahead of

the price movement. It gives an advance signal before the share

price line takes a reversal direction.

Relative Strength Index

Relative Strength Index (RSI) us is one of the very few sophisticated

Oscillators used in technical analysis. The others which we have already

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discussed in the previous issues are stochastic and MACD. The rate of

change and momentum are some of the widely used simple oscillators.

There are some flaws like erratic movement due to sudden drop or rise in

the price movement even in a single trading day in the usage of simple

oscillators. For instance, in a 10 day momentum, a sharp advance or

decline ten days back can cause sudden shifts in momentum line even if

there is a marginal or no change in current prices. Therefore, it is

necessary to reduce these distortions and smoothen the oscillator

indicator distortions and smoothen the oscillator indictor distortion and

smoothen the oscillator indicator. The other problem in simple oscillators

is that there is no specified range on vertical scale. Mainly to address

these two major problems of simple oscillators RSI was developed by J.

Welles Wilder, Jr. in 1978. RSI indicator provides not only the required

smoothing but also 0 and 100 as lower and upper limits respectively for

its vertical scale.

RSI is calculated using the following formula.

RSI=100 – {100 / (1+RS)}

Where RS = Average of n periods price gains

Average of n periods price losses

7 day RS value = (8/7) / (4/7) = 1.143 / 0.571=2

RSI= 100 – {100 / (1+RS)}

= 100 – {100 / (1+2)}

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=100- 33.33 = 66.67.

The RSI value for the seventh day is 66.67. For calculating the RSI value

for the eighth day, we have to exclude the first day closing price and

include the price on the eighth day. We can calculate RSI for any time

period. The most widely used period is 14 days. Some technical analysts

also use lesser time periods like 5 - day, 7 – day, 9 – day to get the

quicker signals. Like I any other Oscillators, shorter the time period, the

more sensitive and volatile the RSI becomes. Therefore, to reduce the

misleading signals Wilder recommended and used a 14 day period for

constructing RSI.

RSI CALCULATION

   

CHANGE IN PRICE OVER

PREVIOUS DAY

DAY CLOSING PRICE GAIN LOSS

1 43 0 0

2 45 2 0

3 44 0 1

4 46 2 0

5 45 0 1

6 43 0 2

7 47 4 0

       

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TOTAL 8 4

Interpretation:

The RSI values are plotted on chart with a vertical scale of 0 to

100.

If the RSI moves above the value 70, it is considered as

overbought.

If the RSI moves below the value 30, it is treated as an oversold

zone.

In other words, there may be down trends in the price after the RSI

moving above the 70 level and prices may recover and look up after the

RSI falls below 30 level. Generally, RSI indicator crosses the 70 level

much before the share price touches the peak. Similarly, RSI line goes

below the 30 level well ahead of price lifting the bottom. Hence, RSI

gives an advance signal for reversal share price movements.

Failure swings: we can see the failure in rallies and also in declines when

the RSI is above 70 and 30 respectively. Failure “A” in rally when the

RSI rises above 70 rises again but fails to reach the level 70 and below

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the prior lower level. This is a clear sell signal. Failure at bottom of

when the RSI in a downtrend. Failure “B” explains the failure in decline

when fails to set new low and starts an uptrend to exceed previous peak.

Divergence:

According to Wilder, divergence is the most indicative character of the

RSI which gives a warning signal for likely reversal in share movement.

Hence, the divergence is between the RSI line and the share price. For

instance, if the RSI line is falling below from the level of 80 to 70 and a

same time the share price is still in an uptrend, it gives as indication that

the share price is also likely to reverse its direction shortly. This

divergence gives a sell signal.

Similarly, we get a buy signal when the RSI line is moving up below the

level 30 and at the same time the share price is still continuing in a

downtrend.

The RSI indicator simply means

Buy, when the RSI line is crossing up through the 50 level and

Sell, when the RSI line is crossing down through the 50 level.

We can also identify the chart patterns like triangles, flags, rectangles in

the RSI line and interpret the same way as in price chart. Support and

Resistance levels also can be drawn for RSI charts.

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These Oscillators are quite useful only for short terms investors and

traders. These are not useful for long term investors, because they cannot

simply sell their shares for the simple reason that RSI has moved above

the 70 level. The first entry of RSI into the overbought zone is only a

first warning signal. One has to wait for further confirmations before

really liquidating his portion

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TECHNICAL ANALYSIS OF SBIN

State Bank of India- History

The origin of the State Bank of India goes back to the first decade of

the nineteenth century with the establishment of the Bank of Calcutta

in Calcutta on 2 June 1806. Three years later the bank received its

charter and was re-designed as the Bank of Bengal (2 January 1809).

A unique institution, it was the first joint-stock bank of British India

sponsored by the Government of Bengal. The Bank of Bombay (15

April 1840) and the Bank of Madras (1 July 1843) followed the Bank

of Bengal. These three banks remained at the apex of modern

banking in India till their amalgamation as the Imperial Bank of

India on 27 January 1921.

1955 - On 1st July State Bank of India was constituted under the

State Bank of India Act 1955, for the purpose of taking over the

undertaking and business of the Imperial Bank of India. The

Imperial Bank of India

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was founded in 1921 under the Imperial Bank of India Act 1920.

The Bank transacts general banking business of every description

including,

foreign exchange, merchant banking and mutual funds.

Management of - SBI

Name Designation

Pratip Chaudhuri Chairman / Chair Person

A Krishna Kumar Managing Director

Ashok Jhunjhunwala Director

S Venkatachalam Director

G D Nadaf Director

Parthasarthy Iyengar Director

Subir Vithal Gokran Director

Deepak Ishwarbhai Amin Non Official Part Time Director

Name Designation

Hemant G Contractor Managing Director

Diwakar Gupta Managing Director

Dileep C Choksi Director

D Sundaram Director

Rashpal Malhotra Non Official Part Time Director

D K Mittal Director

Jyoti Bhushan Mohapatra Director

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CONCLUSION:-

Technical Analysis of State Bank of India:

3 Years data taken (1st-Jan-2009 to 27th-Feb-2012)

Bar Chart

Candle Stick Chart

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Line Chart

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Rate of Change (ROC)

Relative Strength Index (RSI)

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When 50 DMA crosses 200 DMA in Upside that time In

Technical words it’s called as GOLDEN CROSS it’s a strong

bullish signal

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As per charts SBI has strong support @ 2040 & 1880 &

Resistance @ 2190, 2390 & 2450.

Whereas RSI is crossing up 50 level which Indicate Buy Signal.

and if we see 10 days ROC is above 1 but declining the price

rises at lower rate than the earlier growth rate which indicate

bearish signal. But if we take 3 years data and calculate ROC

then we can see “ROC line is above 1 and rising; the difference

between the current day price and 10 days back price grows at an

increasing rate (bullish signal)”

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Recommendation: - Buy SBI at current level i.e. 2100-

2130,

Short term Target 2190 & 2390, Stop Loss @ 2040

Long Term Target above 2390 2540 and above this

level 2600 - - 2700 Targets is there, Stop Loss @ 2040

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BIBLIOGRAPHY

www.investopedia.com

www.onlincetradingconcepts.com

www.nseindia.com

www.bseindia.com

And Help taken by my office colleague Mr Chandrashekhar Khamkar (Reliance Securities) who has good knowledge of technical analysis.

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