technical analysis by pallavi

8/14/2019 Technical Analysis by pallavi

1/35

TECHNICALTECHNICALANALYSISANALYSIS


2/35

Technical analysis is the process ofTechnical analysis is the process ofanalyzing a security's historical prices inanalyzing a security's historical prices in

an effort to determine probablean effort to determine probablefuture pricesfuture prices

Like fundamental analysis where factors likeLike fundamental analysis where factors likeearnings of the company, management,earnings of the company, management,

product etc . are studied, technical analysis isproduct etc . are studied, technical analysis isbased on the study of the behavior of pastbased on the study of the behavior of past

pricesprices


3/35

The basic assumptions underline the technical analysisThe basic assumptions underline the technical analysisare as follows:are as follows:

Market value is determined solely by the interaction ofMarket value is determined solely by the interaction ofsupply and demandsupply and demand

Supply and demand are governed by numerous factors,Supply and demand are governed by numerous factors,

both rational and irrationalboth rational and irrational

Changes in trend are caused by shifts in supply andChanges in trend are caused by shifts in supply anddemanddemand

Shifts in supply and demand, no matter why they occur,Shifts in supply and demand, no matter why they occur,can be detected sooner or later in charts of market valuecan be detected sooner or later in charts of market value

Some chart patterns tend to repeat themselvesSome chart patterns tend to repeat themselves


4/35

Technical analysis is done from four important view points:Technical analysis is done from four important view points:

1.1. Price:Price:-- changes in price reflect changes in investor attitude andchanges in price reflect changes in investor attitude anddemand for and supply of securitiesdemand for and supply of securities

2.2. Time:Time:-- the degree of movement in prices is a function of time.the degree of movement in prices is a function of time.The longer it takes for a reversal in trend, the greater the priceThe longer it takes for a reversal in trend, the greater the pricechange that would followchange that would follow

3.3. Volume:Volume:-- the intensity of price changes is reflected in thethe intensity of price changes is reflected in thevolume of transactions that accompany the change. Anvolume of transactions that accompany the change. Anincrease in price accompanied by a low volume implies that theincrease in price accompanied by a low volume implies that thechange is not strong enoughchange is not strong enough

4.4. Breadth:Breadth:-- the quality of price change is measured by studyingthe quality of price change is measured by studyingwhether a change in trend spread across most sectors andwhether a change in trend spread across most sectors andindustries or is concentrated in a few stocks.industries or is concentrated in a few stocks.


5/35

CHARTSCHARTS

The foundation of technical analysis is the chartThe foundation of technical analysis is the chart

Line charts are typically displayed using a security'sLine charts are typically displayed using a security'sclosing prices.closing prices.

11.. LineLine chartscharts


6/35

22.. BarBar chartscharts

A bar chart displays a security's open, high, low, andA bar chart displays a security's open, high, low, andclosing prices.closing prices.


7/35

The top of each vertical bar represents the highest priceThe top of each vertical bar represents the highest price

that the security traded during the period, and the bottomthat the security traded during the period, and the bottomof the bar is the lowest price it traded. A closing "tick" isof the bar is the lowest price it traded. A closing "tick" isdisplayed on the right side of the bar to designate thedisplayed on the right side of the bar to designate thelast price the security traded. If opening prices arelast price the security traded. If opening prices areavailable, they are signified by a tick on the left side ofavailable, they are signified by a tick on the left side of

the bar.the bar.

33.. VolumeVolume barbar chartchart

Volume is usually displayed as a bar graph at theVolume is usually displayed as a bar graph at thebottom of the chartbottom of the chart


8/35

44.. CANDLESTICKSCANDLESTICKS -- JAPANESEJAPANESE

Candlestick charts display the open, high, low, andCandlestick charts display the open, high, low, andclosing prices in a format similar to a modernclosing prices in a format similar to a modern--day barday bar--chartchart


9/35

Candlesticks display the relationship between theCandlesticks display the relationship between theopen, high, low, and closing pricesopen, high, low, and closing prices

They cannot be displayed on securities that only haveThey cannot be displayed on securities that only haveclosing prices, nor were they intended to be displayedclosing prices, nor were they intended to be displayedon securities that lack opening prices.on securities that lack opening prices.

If you want to display a candlestick chart on a securityIf you want to display a candlestick chart on a securitythat does not have opening prices, you use the previousthat does not have opening prices, you use the previousday's closing prices in place of opening pricesday's closing prices in place of opening prices.


10/35

Head and Shoulders pattern:Head and Shoulders pattern:

This is widely used as a reversal pattern. This occursThis is widely used as a reversal pattern. This occurswhen smaller rallies flanking a higher rally just as thewhen smaller rallies flanking a higher rally just as thehead lies in between two shoulders.head lies in between two shoulders.


11/35

The shoulders are not always symmetricalThe shoulders are not always symmetrical

The right shoulder confirms the beginning of a bear marketThe right shoulder confirms the beginning of a bear market

The line that joins the points from where the final rally (head)The line that joins the points from where the final rally (head)begins and ends is called the neckline. A trend reversal alwaysbegins and ends is called the neckline. A trend reversal alwaysoccurs when the neckline is penetrated by the price lineoccurs when the neckline is penetrated by the price line

The head and shoulder pattern may be formed over short periods of a fewThe head and shoulder pattern may be formed over short periods of a fewweeks or take even years to emerge. Longer the period stronger is the bearweeks or take even years to emerge. Longer the period stronger is the beartrendtrend


12/35

Trend lineTrend line

A line on the price or value chart of a security depictingA line on the price or value chart of a security depictingthe general direction in which the security is headed.the general direction in which the security is headed.

Prevailing trends, either up or down, will determine where a security isPrevailing trends, either up or down, will determine where a security isheaded.headed. Trend linesTrend lines can be usedcan be used to analyze individual securities, suchto analyze individual securities, suchas stocks, commodities or indexesas stocks, commodities or indexes


13/35

volume increased whenvolume increased whenthe trend line wasthe trend line waspenetrated. This is anpenetrated. This is an

important confirmationimportant confirmationthat the previous trendthat the previous trendis no longer intact.is no longer intact.


14/35

Buck The Trend:Buck The Trend:

When a security goes against the prevailing trend ofWhen a security goes against the prevailing trend ofthe overall market. A stock that goes up during athe overall market. A stock that goes up during abear market is said to be "bucking the trend".bear market is said to be "bucking the trend".

Symmetrical Triangle:Symmetrical Triangle:

Both trend lines act asBoth trend lines act asbarriers that prevent thebarriers that prevent theprice from headingprice from headinghigher or lower, but oncehigher or lower, but oncethe price breaches one ofthe price breaches one of

these levels, a sharpthese levels, a sharpmovement often followsmovement often follows


15/35

SUPPORT & RESISTANCESUPPORT & RESISTANCE

SecuritySecurity pricesprices isis thethe resultresult ofof aa headhead--toto--headhead battlebattlebetweenbetween aa bullbull (the(the buyer)buyer) andand aa bearbear (the(the seller)seller)..

TheThe bullsbulls pushpush pricesprices higherhigher andand thethe bearsbears pushpushpricesprices lowerlower.. TheThe directiondirection pricesprices actuallyactually movemove

revealsreveals whowho isis winningwinning thethe battlebattle..

If each time prices fell to a certain level, the bulls (theIf each time prices fell to a certain level, the bulls (thebuyers) took control and prevented prices from fallingbuyers) took control and prevented prices from fallingfurther and sellers were not willing to sell for less thanfurther and sellers were not willing to sell for less than

that pricethat price

This type of price action is referred to as supportThis type of price action is referred to as support


16/35

Similar to support, a "resistance" level is the point atSimilar to support, a "resistance" level is the point atwhich sellers take control of prices and prevent themwhich sellers take control of prices and prevent them

from rising higher.from rising higher.


17/35

TheThe priceprice atat whichwhich aa tradetrade takestakes placeplace isis thethe priceprice atatwhichwhich aa bullbull andand bearbear agreeagree toto dodo businessbusiness..

ItIt representsrepresents thethe consensusconsensus ofof theirtheir expectationsexpectations.. TheThebullsbulls thinkthink pricesprices willwill movemove higherhigher andand thethe bearsbears thinkthinkpricesprices willwill movemove lowerlower..

SupportSupport levelslevels indicateindicate thethe priceprice wherewhere thethe majoritymajority ofofinvestorsinvestors believebelieve thatthat pricesprices willwill movemove higher,higher, andand

ResistanceResistance levelslevels indicateindicate thethe priceprice atat whichwhich aa majoritymajority

ofof investorsinvestors feelfeel pricesprices willwill movemove lowerlower..


18/35

A good way to quantify expectations following aA good way to quantify expectations following abreakout is with the volume associated with the pricebreakout is with the volume associated with the price

breakoutbreakout

If prices break through the support/resistance level withIf prices break through the support/resistance level witha large increase in volume and the traders' remorsea large increase in volume and the traders' remorseperiod is on relatively low volume, it implies that theperiod is on relatively low volume, it implies that thenew expectations will rule (a minority of investors arenew expectations will rule (a minority of investors areremorseful).remorseful).

ifif thethe breakoutbreakout isis onon moderatemoderate volumevolume andand thethe

"remorseful""remorseful" periodperiod isis onon increasedincreased volume,volume, itit impliesimpliesthatthat veryvery fewfew investorinvestor expectationsexpectations havehave changedchanged andandaa returnreturn toto thethe originaloriginal expectationsexpectations (i(i..ee..,, originaloriginalprices)prices) isis warrantedwarranted..


19/35

ResistanceResistance becomesbecomes supportsupport

WhenWhen aa resistanceresistance levellevel isis successfullysuccessfully penetrated,penetrated, thatthatlevellevel becomesbecomes aa supportsupport levellevel..

Similarly,Similarly, whenwhen aa supportsupport levellevel isis successfullysuccessfullypenetrated,penetrated, thatthat levellevel becomesbecomes aa resistanceresistance levellevel..


20/35

Resistance changing to support chartResistance changing to support chart

Here when prices broke above the resistance level ofHere when prices broke above the resistance level of$45.00, the level of $45.00 became the new support$45.00, the level of $45.00 became the new supportlevellevel


21/35

When prices drop below a support level, that level oftenWhen prices drop below a support level, that level oftenbecomes a resistance level that prices have a difficultbecomes a resistance level that prices have a difficult

time penetrating. When prices approach the previoustime penetrating. When prices approach the previoussupport level, investors seek to limit their losses bysupport level, investors seek to limit their losses bysellingselling


22/35

INDICATORSINDICATORS

An indicator is a mathematical calculation that can beAn indicator is a mathematical calculation that can beapplied to a security's price and/or volume fields.applied to a security's price and/or volume fields.

The result is a value that is used to anticipate futureThe result is a value that is used to anticipate futurechanges in prices.changes in prices.

MOVINGMOVING AVERAGESAVERAGES

A Moving Average is an indicator that shows theA Moving Average is an indicator that shows theaverage value of a security's price over a period ofaverage value of a security's price over a period oftime.time.

Moving averages can be calculated on any data seriesMoving averages can be calculated on any data seriesincluding a security's open, high, low, close, volumeincluding a security's open, high, low, close, volume


23/35

There are five popular types of moving averages:There are five popular types of moving averages:SimpleSimple

ExponentialExponentialTriangularTriangularVariable andVariable andWeightedWeighted

SimpleSimple movingmoving averagesaverages applyapply equalequal weightweight toto thethe pricesprices..ExponentialExponential andand weightedweighted averagesaverages applyapply moremore weightweighttoto recentrecent pricesprices..TriangularTriangular averagesaverages applyapply moremore weightweight toto pricesprices inin thethemiddlemiddle ofof thethe timetime periodperiod..

variablevariable movingmoving averagesaverages changechange thethe weightingweighting basedbasedonon thethe volatilityvolatility ofof pricesprices..


24/35

TrendTrend MovingMoving AverageAverage

VeryVery ShortShort TermTerm 55--1313 daysdays

ShortShort TermTerm 1414--2525 daysdays

MinorMinor IntermediateIntermediate 2626--4949 daysdays

IntermediateIntermediate 5050--100100 daysdaysLongLong TermTerm 100100--200200 daysdays


25/35

Moving Average Convergence Divergence (MACD)Moving Average Convergence Divergence (MACD)

MACD is the difference between a security's 26MACD is the difference between a security's 26--day and 12day and 12--daydayExponential Moving Averages (EMAs).Exponential Moving Averages (EMAs).

Of the two moving averages that make up MACD, the 12Of the two moving averages that make up MACD, the 12--day EMAday EMA

is the faster and the 26is the faster and the 26--day EMA is the slower. Closing prices areday EMA is the slower. Closing prices areused to form the moving averagesused to form the moving averages

Usually, a 9Usually, a 9--day EMA of MACD is plotted along side to act as aday EMA of MACD is plotted along side to act as atrigger linetrigger line

A bullish crossover occurs when MACD moves above its 9A bullish crossover occurs when MACD moves above its 9--daydayEMA, and a bearish crossover occurs when MACD moves belowEMA, and a bearish crossover occurs when MACD moves belowits 9its 9--day EMAday EMA


26/35

Chart shows the 12Chart shows the 12--day EMA (thin blue line) with the 26day EMA (thin blue line) with the 26--day EMA (thin redday EMA (thin redline) overlaid the price plot.line) overlaid the price plot. MACDMACD appears in the box below as the thickappears in the box below as the thickblack line and its 9black line and its 9--day EMA is the thin blue line. The histogramday EMA is the thin blue line. The histogramrepresents the difference betweenrepresents the difference between MACDMACD and its 9and its 9--day EMA. The histogramday EMA. The histogramis positive whenis positive when MACDMACD is above Its 9is above Its 9--day EMA and negative whenday EMA and negative when MACDMACD isisbelow its 9 day EMAbelow its 9 day EMA


27/35

When the MACD is above zero, it means the 12When the MACD is above zero, it means the 12--daydaymoving average is higher than the 26moving average is higher than the 26--day movingday moving

average.average.

This is bullish as it shows the current expectations (i.e.,This is bullish as it shows the current expectations (i.e.,the 12the 12--day moving average) are more bullish thanday moving average) are more bullish thanprevious expectations (i.e., the 26previous expectations (i.e., the 26--day average). Thisday average). This

implies a bullish, or upward, shift in the supply/demandimplies a bullish, or upward, shift in the supply/demandlines.lines.

When the MACD falls below zero, it means that the 12When the MACD falls below zero, it means that the 12--day moving average is less than the 26day moving average is less than the 26--day movingday movingaverage, implying a bearish shift in the supply/demandaverage, implying a bearish shift in the supply/demandlines.lines.


28/35

"Bullish" when the MACD was above zero and"Bullish" when the MACD was above zero and"Bearish" when it was below zero."Bearish" when it was below zero.


29/35

A 9A 9--day moving average is usually plotted on top of theday moving average is usually plotted on top of theMACD indicator. This line is referred to as the "signal"MACD indicator. This line is referred to as the "signal"

line.line.

Chart shows the MACD (the solid line) and its signal lineChart shows the MACD (the solid line) and its signal line(the dotted line). "Buy" arrows were drawn when the(the dotted line). "Buy" arrows were drawn when theMACD rose above its signal line; "sell" arrows wereMACD rose above its signal line; "sell" arrows weredrawn when the MACD fell below its signal line.drawn when the MACD fell below its signal line.


30/35

Rational behind this TechniqueRational behind this Technique--

The MACD is the difference between two movingThe MACD is the difference between two movingaverages of price.averages of price.

When the shorterWhen the shorter--term moving average rises aboveterm moving average rises abovethe longerthe longer--term moving average (i.e., the MACD risesterm moving average (i.e., the MACD risesabove zero), it means that investor expectations areabove zero), it means that investor expectations arebecoming more bullish (i.e., there has been an upwardbecoming more bullish (i.e., there has been an upwardshift in the supply/demand lines).shift in the supply/demand lines).

By plotting a 9By plotting a 9--day moving average of the MACD, weday moving average of the MACD, we

can see the changing of expectations (i.e., the shiftingcan see the changing of expectations (i.e., the shiftingof the supply/demand lines)of the supply/demand lines)


31/35

The RSI compares the magnitude of a stock's recent gains to theThe RSI compares the magnitude of a stock's recent gains to the

magnitude of its recent losses and turns that information into amagnitude of its recent losses and turns that information into anumber that ranges from 0 to 100. It takes a single parameter, thenumber that ranges from 0 to 100. It takes a single parameter, thenumber of time periods to use in the calculation. Using 14 periods isnumber of time periods to use in the calculation. Using 14 periods isvery popularvery popular

100100RSI = 100RSI = 100 -- ----------------

1 + RS1 + RSRS = Average Gain / Average LossRS = Average Gain / Average LossAverage Gain = [(previous Average Gain) x 13 + current Gain] / 14Average Gain = [(previous Average Gain) x 13 + current Gain] / 14First Average Gain = Total of Gains during past 14 periods / 14First Average Gain = Total of Gains during past 14 periods / 14

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14Average Loss = [(previous Average Loss) x 13 + current Loss] / 14First Average Loss = Total of Losses during past 14 periods / 14First Average Loss = Total of Losses during past 14 periods / 14Note: "Losses" are reported as positive values.Note: "Losses" are reported as positive values.

CCalculationalculation

Relative Strength Index (RSI)Relative Strength Index (RSI)


32/35

RSI = 100RSI = 100 -- 100100

RS = Average of x days' up closes /Average of x days' down closes

1 + RS1 + RS

OrOr


33/35

To calculate RSI values for a given datasetTo calculate RSI values for a given dataset--

First find the magnitude of all gains and losses for the 14 periodsFirst find the magnitude of all gains and losses for the 14 periods

prior to the time where you wish to start the calculation.prior to the time where you wish to start the calculation.

(Note: 14 is the standard number of periods used when calculating(Note: 14 is the standard number of periods used when calculatingthe RSI. If a different number is specified, just substitute thatthe RSI. If a different number is specified, just substitute thatnumber in for "14 throughout)number in for "14 throughout)

It is important to understand that the RSI is a "running" calculationIt is important to understand that the RSI is a "running" calculationand the accuracy of the calculation depends on how long ago theand the accuracy of the calculation depends on how long ago thecalculations started. The first RSI value is an estimatecalculations started. The first RSI value is an estimate -- subsequentsubsequentvalues improve on that estimate.values improve on that estimate.

To start the running calculation, the First Average Gain is calculated as theTo start the running calculation, the First Average Gain is calculated as thetotal of all gains during the past 14 periods divided by 14. Similarly, thetotal of all gains during the past 14 periods divided by 14. Similarly, the

First Average Loss is calculated as the total magnitude of all losses duringFirst Average Loss is calculated as the total magnitude of all losses duringthe past 14 periods divided by 14. The next values for the "averages" arethe past 14 periods divided by 14. The next values for the "averages" arecalculated by taking the previous value, multiplying it by 13, adding in thecalculated by taking the previous value, multiplying it by 13, adding in thenext Gain (or Loss), and then dividing by 14.next Gain (or Loss), and then dividing by 14.


34/35

The RS value is simply the Average Gain divided by the AverageThe RS value is simply the Average Gain divided by the AverageLoss for each period.Loss for each period.

Finally, the RSI is simply the RS converted into an oscillator thatFinally, the RSI is simply the RS converted into an oscillator thatgoes between zero and 100 using this formula: 100goes between zero and 100 using this formula: 100 -- (100 / RS + 1)(100 / RS + 1)

When the Average Gain is greater than the Average Loss, the RSIWhen the Average Gain is greater than the Average Loss, the RSIrises because RS will be greater than 1rises because RS will be greater than 1

Conversely, when the Average Loss is greater than the AverageConversely, when the Average Loss is greater than the AverageGain, the RSI declines because RS will be less than 1Gain, the RSI declines because RS will be less than 1

The last part of the formula ensures that the indicator oscillatesThe last part of the formula ensures that the indicator oscillatesbetween 0 and 100. Note: If the Average Loss ever becomes zero,between 0 and 100. Note: If the Average Loss ever becomes zero,

RSI becomes 100 by definitionRSI becomes 100 by definition


35/35

CloseClose

46.125046.1250

11 47.125047.1250

22 46.437546.437533 46.937546.9375

44 44.937544.9375

55 44.250044.2500

66 44.625044.6250

77 45.750045.7500

88 47.812547.812599 47.562547.5625

1010 47.000047.0000

1111 44.562544.5625

1212 46.312546.3125

1313 47.687547.6875

1414 46.687546.68751515 45.687545.6875

1616 43.062543.0625

1717 43.562543.5625

1818 44.875044.8750

1919 43.687543.6875

technical analysis by pallavi

Documents