TECHNICAL ANALYSIS

Introduction

• What is Technical Analysis?• Philosophy or Rationale

– Market action discounts everything

– Prices move in trends– History repeats itself

• Technical VS Fundamental Forecasting

The Bar Chart

                                                                                          

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• A candlestick chart is a style of bar-chart used primarily to describe price movements of an equity over time.

• It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.

Candlestick Chart

20December

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DOW THEORY

1. The averages discount everything2. The market has three trends

- Up trend, Down trend and Sideway- A trend has 3 parts: primary, secondary

and minor

3. Major trends have 3 phase - Accumulation - A public participation- A distribution

Classical Chart Analysis

• Support and Resistance

• Trendlines

• Trading Range (Channel)

• Price patterns

Support and Resistance

What Does Support (Support Level) Mean?The price level which, historically, a stock has had difficulty falling below. It is thought of as the level at which a lot of buyers tend to enter the stock.

Often referred to as the "support level".

Trend lines

• Draw a trendline through the edges of congestion areas

• The most important feature of a trendline is its angle

• Trendlines show the action of bulls and bears

Trendline

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Trendline

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SET (591.480, 614.990, 591.480, 614.990, +32.4800), pp (Dow 30) :: Retrace (2 Plots) *, pp (Dow 30) :: Fibonacci Ladder *, pp (Dow 30) :: Fibonacci Ladder *

Trendline

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760770780790800810820SETV (714.180, 718.060, 713.910, 716.920, +6.58997)

Channel

Dec 2002 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2003 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004 Feb Mar Apr May Jun W

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ADVANC (80.5000, 84.0000, 80.5000, 83.5000, +3.50000), zz (82.6667)

• What Does Descending Channel Mean?A descending channel or downtrend is the price action contained between two downward sloping parallel lines. Lower pivot highs and lower pivot lows are a bearish signal. In a downtrend, a trade might be entered at the trendline and exited at the channel line. A lower low below a descending channel can signal continuation. A higher high above the low of an ascending channel can signal trend change.

Price Patterns

• Five most major reversal patterns:

•Head & Shoulder

•Triple top and bottom

•Double top and bottom

•Spike top and bottom

•Rounding

H & S

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1050SET (604.870, 614.990, 576.630, 614.990, +5.27002), pp (Dow 30) :: Retrace (2 Plots) *, pp (Dow 30) :: Fibonacci Ladder *, pp (Dow 30) :: Fibonacci Ladder *

Rounding

A S O N 1998 A M J J A S O N D 1999 A M J J A S O N D 2000 A M J A S O D 2001 A M J J A S O D 2002 A M J J A S O N D 2003 A M J J A S O N D 2004 A M J A

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Double top

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Double top

• Although there can be variations, the classic double top marks at least an intermediate change, if not long-term change, in trend from bullish to bearish. Many potential double tops can form along the way up, but until key support is broken, a reversal cannot be confirmed.

Computerized Technical Analysis

• CTA is more objective than classical charting

• Two major Groups of indicators– Trend-following indicators-Moving

average – Oscillator-Stochastic, Rate of

Change Momentum,Relative Strength Index

Moving Average

• The MA is a follower not a leader

• Good MA is sensitive enough to generate early signal but insensitive enough to avoid “ noise”

• Two popular combination- 5 and 25

• Simple MA = P1+P2+... Pn

N

Moving Average

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SETV (708.980, 712.780, 708.810, 710.330, +1.60004)

Oscillator (OSC)

• The OSC is useful in non-trending market.• What Does Oscillator Mean?

A technical analysis tool that is banded between two extreme values and built with the results from a trend indicator for discovering short-term overbought or oversold conditions. As the value of the oscillator approaches the upper extreme value the asset is deemed to be overbought, and as it approaches the lower extreme it is deemed to be oversold.

• Three situation when OSC is most useful:– OSC reaches an extreme reading –upper or lower

end– A divergence b/w OSC and price – The crossing of the zero line

Momentum

November December2003 February March April May June July August September October November December 2004 February March April May JuneV

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SET (591.480, 614.990, 591.480, 614.990, +32.4800), pp (Dow 30) :: Retrace (2 Plots) *, pp (Dow 30) :: Fibonacci Ladder *, pp (Dow 30) :: Fibonacci Ladder *

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Stochastic

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SET (591.480, 614.990, 591.480, 614.990, +32.4800), pp (Dow 30) :: Retrace (2 Plots) *, pp (Dow 30) :: Fibonacci Ladder *, pp (Dow 30) :: Fibonacci Ladder *

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• Developed by George C. Lane in the late 1950s, the Stochastic Oscillator is a momentum indicator that shows the location of the current close relative to the high/low range over a set number of periods. Closing levels that are consistently near the top of the range indicate accumulation (buying pressure) and those near the bottom of the range indicate distribution (selling pressure).

Relative Strength Index (RSI)

• What Does Relative Strength Index - RSI Mean?

• A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

MACD

1. Crossovers - As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when the MACD rises above the signal line, the indicator gives a bullish signal, which suggests that the price of the asset is likely to experience upward momentum. Many traders wait for a confirmed cross above the signal line before entering into a position to avoid getting getting "faked out" or entering  into a position too early, as shown by the first arrow. 

2. Divergence - When the security price diverges from the MACD. It signals the end of the current trend.

3. Dramatic rise - When the MACD rises dramatically - that is, the shorter moving average pulls away from the longer-term moving average - it is a signal that the security is overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the position of the short-term average relative to the long-term average. When the MACD is above zero, the short-term average is above the long-term average, which signals upward momentum. The opposite is true when the MACD is below zero. As you can see from the chart above, the zero line often acts as an area of support and resistance for the indicator.

• A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.

• A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals. 

MARKET GURUs

&

PRICE PREDICTION

FIBONACCI

• Fibonacci (1170-1240) lived and worked as a merchant and mathematician in Pisa, Italy

• Fibonacci summation series: 1,1,2,3,5,8,13,21,34,55,……..

• The ratio of any number to its next higher number approaches 0.618

• The ratios or alternate numbers approach 2.618 or its inverse 0.382

• Fibonacci percentage retrenchments or projection are 61.8%, 38% and 50%

Fibonacci

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SETV (687.410, 688.070, 676.840, 685.040, -1.17004)

Fibonacci Fan

A M J J A S O N D 2002 M A M J J A S O N D 2003 M A M J J A S O N D 2004 M A M J J A S O N D 2005 M A M J J A S O N

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Fibonacci Arc

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Fibonacci Retrenchment

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SETV (679.090, 686.400, 679.090, 685.040, +8.19995)

Fibonacci Projection

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SETV (687.410, 688.070, 676.840, 685.040, -1.17004)

Fibonacci Projection

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SETV (687.410, 688.070, 676.840, 685.040, -1.17004)

Candlestick

• Candlestick charts are the oldest type of charts use for price prediction

• Date back to the 1700’s,when they were used for predicting rice price

• Sokuta Honma is said to have executed over 100 consecutive winning trades!!

• Sakata’s method is the first verifiable beginning of pattern recognition

Type of Chart

•The signals are created by the change in investor sentiment

Common Candlestick Terminology

              

White Candlestick

Hammer

Doji Line

Spinning top

Black Candlestick

HAMMER

Engulfing

STAR FORMATION

Doji Star

Reversal patterns

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NPC (128.000, 128.000, 127.000, 127.000, +0.000)

Technical Checklist

• What is the direction of overall market?

• Where are the important support and resistance level?

• Are there any major reversal patterns visible?

• Are the oscillators overbought or over sold?

• What about Fibonacci retrenchments or projection?