A STUDY ON

INVESTMENT DECISIONS ON PRECIOUS METALS ---TECHNICAL

ANALYSIS
(With reference to)
K P COMMODITIES
Submitted by
GOVERDHAN V
H!N"!#$%#&''#(
O)m*+i* U+i,e-)ity
MASTER O. /USINESS ADMINISTRATION
%##& 0 %#'#(
In partial fulfillment of the requirements for the award of
GRAHAM/ELL PG COLLEGE .OR M/A
THUMKUNTA1 SHAMIRPET ROAD1 SEC2/AD-3###4&
ACKNO5LEDGEMENT
I express my special thanks to Mr. K-i)6+* P-*dee7 Li+8*9* for his
encouragement and granting permission to do this project work in their
company, and express my thanks to him for his alua!le guidance and support.
I would like to thank "rof. #.$."$%#%&, head of the department 'raham
!ell "' (ollege, secundera!ad for his inspiration and timely support in
successful completion of this project work.
I express my gratitude to Mr. (. ).#%#*$+, "rincipal, 'raham!ell "' (ollege
sec,!ad. I am ery thankful to my guide Mr. "$%#%&, -aculty mem!er of
'raham!ell "' (ollege for proiding the alua!le guidance.
I am thankful to my parents and all my friends who are co,operated to
complete this project.
GOVERDHAN V
(./0.122.)


CERTI.ICATE /Y THE GUIDE
*his is certify that the project report title INVESTMENT DECISIONS IN
COMMDITIES /ASED ON TECHNICAL ANALYSIS ":
K P COMMODITIES su!mitted in partial fulfillment of masters degree in
commerce of OSMANIA UNIVERSITY, 3ydera!ad was carried !y
GOVERDHAN V (3.*.45,./.,0.1,22.) under my guidance. *his has not
!een su!mitted to any other uniersity or institution for the award of any
&egree6&iploma6(ourse
#ignature of the 'uide
")%(7

#.$."$%#%&
)ecturer in management.
&ate8
DECLARATION
I here!y declare that the project INVESTMENT DECISIONS IN
COMMDITIES /ASED ON TECHNICAL ANALYSIS has !een carried
out !y me at K P COMMODITIES
It is a !onafide for work undertaken !y me in partial fulfillment of the
requirements for the award of 9Master of :usiness %dministration; from
'$%3%M:7)) "' (5))7'7,
5smania <niersity
*his project has not !een su!mitted to any other uniersity for the award of
degree 6diploma6 certificate or pu!lished any time !efore.
D*te; GOVERDHAN V
S9!N" CONTENTS
'! INTRODUCTON
%! COMPANY PRO.ILE
<! INDUSTRY PRO.ILE
=! TYPES O. ANALYSIS
3! O/>ECTIVES AND DI..ERENCES O. T!A ? .!A
@! CHARTS
4! TREND
&! TRENDLINES
$! SUPPORT ? RESISTANCE
'#! CHART PATTERNS
''! INDICATORS ? OSCILLATORS
'%! .I/ONACCI SERIES
'<! ELLIOT 5AVE THEORY
'=! DO5 THEORY
'3! CONCLUSION
'@! /I/ILOGRAPHY
COMPANY PROFILE
COMPANY PRO.ILE
=.".(ommodities (www.kpcommodities.com), a startup enture aimed at
sering inestors and traders in commodity futures market, is floated !y the
professionals who hae dierse experience in the industry. (ommodity futures
trading is a ery dynamic and complex field which requires multi perspectie
outlook and well spread knowledge to proide genuine serice. We proide
arious commodity consultancy serices according to the needs of traders. *he
serices offered !y the firm primarily fall into research and education which
would !e itemi>ed in serices segment.
-or =." customer is the king and stries to make the market a leel playing field
to eery inestor irrespectie of his portfolio and financial strength. -utures
market is said to !e not suita!le for small inestors who come with little
inestment !ut we !eliee the market can !e made appropriate for any kind of
inestor if the strategy is correct. We help customers to design their own
strategies and trading plans depending upon their risk profile and margin
capacity. "ersonal attention is gien to each and eery client.
=.". (ommodities !eliees in 9=nowledge is a prerequisite to success;.
%!iding !y the same we design education programmes, which would cater to
the needs of all leels of market participants from students, amateur traders,
hedgers, ar!itrageurs, speculators, jo!!ers and experts. *he agenda or
curriculum of the education modules encompasses commodity trading,
economic indicators, fundamental analysis, technical analysis etc.
Te*m;
K!P! )t*+d) :"- K-i)6+* P-*dee7( Li+8*9* who conceied an idea of
esta!lishing a firm with focus on research and education in commodities
markets is an M:% graduate and trained technical analyst. 3e has garnered
around / years of experience, specifically in technical analysis and designing
trading rules. 3is formulas or trading rules deised !ased on arious indicators
of technical analysis hae achieed high success rate and achieed market?s
attention. 3is / years stint in the industry and his association with companies
per optimum (ommodities@ A$' Wealth Management@ Bertex #ecurities has
offered him complex challenges which he handled efficiently. 3e has the credit
of setting up research department at 5ptimum as well as the commodities
trading desk at Bertex #ecurities. 3e majorly focuses on proiding short term
inestment or positional calls in the commodities segment with client safety as
utmost priority.
Y*)*)Ay De,i+e+i1 % !achelor?s graduate in technology in the faulty of
electronics and electrical engineering (777), initiated his career in marketing of
telecom products with Bodafone and shifted to financial markets. #tarted his
profile as a terminal dealer on commodities desk in A$' Wealth Management,
Mr.+asaswy enhanced to !usiness deelopment manager and !ranch in charge
with his next employer Bertex #ecurities )td. Irrespectie of the assignment he
was delegated he stried to execute the responsi!ility with 2..C perfection
applying his entrepreneurial strategies. 3is ha!it of continuous learning has
assisted him to !ecome a guided trader in the area of commodities proiding the
clients utmost serice.
S*ti)6 M*+d*,*, playing an adisory role for =" (ommodities, is an M:%
graduate D %ssociate -inancial "lanner offering oer 2. years of proen skill,
sets in leading !anking D financial serices companies and currently pioneering
his entrepreneurial enture Balue "rop (orporate #olutions to introduce the
same to Esuccess?. &uring his career he successfully proided wealth
management D inestment consultancy serices, handled commodity D stock
!roking, and also managed arious actiities spanning !anking, mutual funds
and insurance. %s well he deeloped commodities hedging strategies, managed
spot D future ar!itrages, traded in deriaties, futures D equity, and ensured
compliance with all related regulatory requirements. 3is role as an adisor to
=.".(ommodities includes steering forward the start,up enture towards growth
with suita!le !usiness deelopment and !rand penetration strategies.
Se-,iBe)
Research
7er wondered why many lose money in futures trading while a few succeed. It
is the just the expert edge that makes all the difference. *he difference is the
way one trades, haing or not haing a trading plan, putting and respecting stop
loss, and honoring markets.
INDUSTRY PRO.ILE
RESEARCH
(ommodity future trading, like any other inesting or trading pattern in
financial markets requires expert guidance as it is a highly intricate actiity that
requires knowledge of multifarious parameters. %s it is difficult for a normal
inestor to get exposure to su!ject knowledge there is a set of market
professionals operating engrossed in research who proide regular guidance,
information, and recommendations.
T6e -e)e*-B6 i+B9ude) tA" *77-"*B6e) :u+d*me+t*9 *+d teB6+iB*9!
.u+d*me+t*9 *+*9y)i) is a means of analy>ing commodities and trying to
predict where the prices of commodities should !e trading and what they will do
in the future. *he main !asis for fundamental analysis is supply and demand.
#upply and demand is a ery simple equation, !ut it gets more complicated
when you try to forecast prices in the future. (ommodities trade in cycles.
#ometimes supplies will !e tight and prices will !e high. 5ther times, we just
hae too much of a commodity and prices fall accordingly. I like to look at
commodities that are trading at multi,year highs or lows. 7entually, the picture
will change and that will lead to a good trading opportunity.
"rice moements in commodities using fundamental analysis can !e !roken
down into these simple formulas8
&emand F #upply G 3igher "rices
#upply F &emand G )ower "rices
Su779y ": C"mm"ditie)
*he supply of a commodity is the amount that is carried oer from
preious year(s) of production and the amount that is !eing produced
during the current year. -or example, the current supplies of soy!eans
would include the amount of crops in the ground and the amount that is
left oer from the preious season. *ypically, the more that is carried
oer from the preious season, the lower the prices will fall.
*here are many factors that can impact the supply of commodities like
weather, amount of acres planted, production strikes, crop diseases and
technology. *he main thing to remem!er when using fundamental
analysis is that high prices for commodities will lead to an increase in
production, as it is more profita!le to produce commodities when prices
are higher. %s you might expect, demand will typically drop as prices
moe higher.
Dem*+d :"- C"mm"ditie)
&emand for commodities is the amount that is consumed at a gien price
leel. *he rule of thum! is that demand will increase when the price of a
commodity moes lower. 5ppositely, demand will decrease as the price
of a commodity increases. *here is an old saying among commodity
traders that low prices cure low prices. *his means that more of a
commodity will !e consumed at lower prices, which lowers the supply
and thus prices will eentually increase.
Aust think a!out how you would use more gasoline at H2.I. per gallon
than you would at HJ per gallon. -undamental analysis of commodities is
simple economics. (onsumption patterns change as the prices of
commodities moe higher and lower.
U)i+8 .u+d*me+t*9 A+*9y)i) t" P-ediBt .utu-e P-iBe) ":
C"mm"ditie)
"rices will fluctuate in the short term, so it is not easy to make fundamental
forecasts of commodities prices and make short,term trades. It is een more
difficult for new commodity traders to do this. I recommend that new traders,
and een experienced traders, use a long,term strategy when using fundamental
analysis to forecast commodity prices. +ou should look for trends that are
deeloping that will cause a shift supply and demand factors.
*o !egin your fundamental research of commodities, there are numerous reports
that are compiled !y goernment sources Many of the larger commodity !rokers
will also pu!lish fundamental research for their clients.
It may seem like a daunting task to find all the current data and compare it to
preious years and see how prices reacted under those conditions. Worse yet,
you hae to forecast in the future as to what the supply and demand scenario
will !e. I can tell you it is almost impossi!le to do this, especially since you will
!e competing against experts who hae a lot more information and experience
than you.
What you want to do is look for trends in production and consumption and trade
with that !ias. -or example, if the supplies of sugar are at a fie,year high and
we just planted a record amount of acres of sugar for this season@ it is likely that
sugar futures will trade with a downward !ias. +ou would !e likely want to
trade from the short side.
4ow, at some point, the price of sugar will get too low and demand will
increase. 5r, there might !e weather pro!lems during the growing season that
will lower the production of sugar. In these cases you hae to !e flexi!le and
reali>e that prices won?t go down foreer.
*he longer,term trends in commodities are easier to spot with fundamental
analysis, !ut I prefer to use technical analysis to capture shorter,term
moements in commodities prices. Most professional commodity traders like to
know what the !ig picture is with commodities using fundamental analysis and
then they use technical analysis to time their entries and exits.
TeB6+iB*9 A+*9y)i)
Most commodity traders incorporate technical analysis into their trading plan.
*echnical analysis differs from fundamental analysis in the sense that it utili>es
prior price action to predict future price moes. -undamental analysis !asically
focuses on supply and demand expectations of commodities to predict future
price action.
Most commodity traders claim to either !e a technical trader or a fundamental
trader. In fact, most commodity traders utili>e !oth methods. I mostly trade off
the charts !ut I keep up on the fundamental picture to look for trades and to
screen some marginal trades if they conflict with my charts.
*o utili>e technical analysis when trading commodities, you will want to start
!y looking at a price chart of the commodity you are interested in trading. *here
are many free sources on the Internet where you can find futures quotes and
charts. -ollowing the trend is one of the golden rules of trading so you will want
to look for a chart that is steadily moing higher or lower.
*ypically with technical trading, you will want to either !uy an up,trending
commodity when it is !reaking out to new highs or it has corrected from the
highs. *his is a matter of preference to your indiidual trading style. I normally
like to !uy retracements within a trend unless a market is extremely strong. If
so, I fell comforta!le !uying new highs.
*he good thing a!out technical analysis is that it applies to all charts, whether
they are I,minute charts for day trading futures or daily charts for longer term
trading. *he first thing you want to do is learn how to read charts and get a !asic
understanding of what types of patterns and indicators might setup market
moes. -rom there, you can moe on to more adanced commodity trading
strategies with technical analysis.
It is important to understand that technical analysis is no an exact science. It is
more of an art. *he same goes for fundamental analysis. +ou will neer !e right
eery time when you trade commodities. *hink of it as playing percentages. If
you are right more often than you are wrong, you will come out ahead if your
aerage loss is the same as your aerage gain.
M*C"- P*-tiBi7*+t)
."-A*-d) M*-Det) C"mmi))i"+
-orwards Markets (ommission (-M() headquartered at Mum!ai, is a
regulatory authority which is oerseen !y the Mi+i)t-y ": C"+)ume- A::*i-)1
.""d *+d Pub9iB Di)t-ibuti"+1 G",t! ": I+di*. It is a statutory !ody set up in
2/IJ under the -orward (ontracts ($egulation) %ct, 2/I0. -M(?s primary
functions encompass adising the central goernment in respect of the
recognition or the withdrawal of recognition from any association or in respect
of any other matter arising out of the administration@ keeping forward markets
under o!seration and act proactiely wheneer needed@ collecting and
wheneer the (ommission thinks it necessary, to pu!lish information regarding
the trading conditions in respect of goods to which any of the proisions of the
act is made applica!le, including information regarding supply, demand and
prices, and to su!mit to the (entral 'oernment, periodical reports of the
working of forward markets relating to such goods@ making recommendations
generally with a iew to improing the organi>ation and working of forward
markets@ and undertaking the inspection of the accounts and other documents of
any recogni>ed association or registered association or any mem!er of such
association wheneer it considers it necessary.
-orward Markets (ommission plays a piotal role in oer iewing the actiity
of market participants such as exchanges, commodity !rokers, research houses
w.r.t the education and client awareness programs they conduct.
Mu9ti C"mm"dity EEB6*+8e MCF(
5ne of the first national leel multi commodity exchanges commenced after
goernment relieing restrictions on commodity futures trading, Multi
(ommodity 7xchange is a demutuali>ed nationwide electronic commodity
futures exchange set up !y -inancial *echnologies (India) )td with permanent
recognition from '5I for facilitating online trading, clearing D settlement
operations for futures market across the country.
N*ti"+*9 C"mm"dity EEB6*+8e NCDEF(
4ational (ommodity D &eriaties 7xchange )imited (4(&7K) is a
professionally managed on,line multi commodity exchange. 4(&7K is the only
commodity exchange in the country promoted !y national leel institutions.
*his unique parentage ena!les it to offer a !ouquet of !enefits, which are
currently in short supply in the commodity markets. 4(&7K is a nation,leel,
technology drien de,mutuali>ed on,line commodity exchange with an
independent :oard of &irectors and professional management , !oth not haing
any ested interest in commodity markets.
/-"De-)
In the industrial hierarchy the first rung would !e occupied !y (ommodity
!rokers, who hae mem!erships at registered exchanges and proide trading
platform for the intended traders and inestors. *hese !rokers would hae a
research department run !y experts who would study arious factors influencing
the market and proide releant recommendations to their clients. *he research
work of !roking houses carry an adantage in terms of num!er of people
working on it and their cumulatie experience as well knowledge sharing.
3oweer it has got its own disadantage as a !roker always concentrates on the
!rokerage income thus compelling him to do regular recommendations in the
market which instigate the clients? to trade in the market. In this process !rokers
compromise on the quality of the calls as they cannot oercome the prejudice.
:rokers impart education to inestors and other market participants at arious
leels. *hese would include those programmes which help an inestor to !egin
with the markets and design his own strategies. 3oweer such education
programmes are not sufficient to make an inestor successful.
I+de7e+de+t Ad,i)"-)
(ertain organi>ations speciali>e in research and proide recommendations to
inestors and traders depending upon their requirement. *hey usually follow the
market using either fundamental information releant to markets or !ased on
technical analysis. 3oweer all such adisors cannot !e !anked upon
completely. Market is different for eery inestor in the sense each participant
(speculator or trader or jo!!er or short term inestor)
K.Ps Services
Re)e*-B6
(ommodities -uture *rading has a potential of generating ery handsome
profits with ery )ow inestment. :ut at the same time, if not traded properly, it
can lead to huge losses too. =.".(ommodities proides highly accurate
positional trading tips for Multi (ommodity 7xchange of India )td.
=.".(ommdoties is committed to help clients cut their losses and grow their
money !y increasing the profit percentages. 5ur tips are !ased on immense
technical analysis. Whether you are an intraday or short term trader@ or
positional inestor we are dedicated to gie you informed adice. 5ur
recommendations hae tight stop loss to protect the capital and relaxed profit
targets make good money for the clients in the markets. %part from technical
indicators we also do a thorough study of fundamental factors such as economic
indicators and their impact on markets. *racking glo!al markets, commodity
news, market dynamics, forecasts et al we delier the !est of the industry in the
form of market lie alerts, analysis, recommendations et al.
=.".(ommodities aim to catch each and eery fluctuation in olatile
commodities !y using methods to maximi>e the return from commodities.
=.".(ommodities alues its customer?s utmost and stries to sere them in the
!est way. -or the registered clients calls would !e proided in the following
means.
:y +ahoo messenger, 'oogle *alk and #M#.
7en the calls and market updates would !e posted on the we!site.
*he calls would !e intraday, :*#*6#*:* as well as positional trading
calls.
#trict stop loss would !e gien to minimi>e the risk.
(omplete follow,up of the calls would !e gien ,F 7ntry, 7xit, #top loss
etc.
Education
*hrough its education wing =.".(ommodities engrosses in deelopment of
education modules in the area of *echnical %nalysis, capital markets and
financial planning. Its target for education modules include those from freshers
in the markets like students to employees in the !roking industry to experienced
clients. *he focus of this serice, apart from !usiness perspectie, is to promote
technical analysis education to facilitate the market participants like clients,
dealers, marketing staff to !e more traders, inestors and adisers. *he
adantage with =.".?s education program lies in its small !atch si>e that would
allow one,to,one concentration, !etter faculty interaction, and sharing ideas.
%part from imparting education we also aim at doing research on different
aspects of *echnical %nalysis theory and design different trading rules that suit
the market enironment.
INTRODUCTION
India, a commodity !ased economy where two,third of the one !illion
population depends on agricultural commodities, surprisingly has an under
deeloped commodity market. <nlike the physical market, futures markets
trades in commodity are largely used as risk management like hedging
mechanism on either physical commodity itself or open positions in commodity
stock.
% jeweler can hedge his inentory against perceied short,term downturn in
gold prices !y going short in the future markets.
*he article aims at know how of the commodities market and how the
commodities traded on the exchange. *he idea is to understand the importance
of commodity deriaties and learn a!out the market from Indian point of iew.
In fact it was one of the most i!rant markets till early L.s. Its deelopment and
growth was shunted due to numerous restrictions earlier. 4ow, with most of
these restrictions !eing remoed, there is tremendous potential for growth of
this market in the country.
56*t i) C"mm"dity M*-DetG
(ommodity market is an important constituent of the financial markets of any
country. It is the market where a wide range of products, i>., precious metals,
!ase metals, crude oil, energy and soft commodities like palm oil, coffee etc. are
traded. It is important to deelop a i!rant, actie and liquid commodity market.
*his would help inestors hedge their commodity risk, take speculatie
positions in commodities and exploit ar!itrage opportunities in the market.
Ty7e) ": B"mm"ditie) t-*ded i+ I+di*
World,oer one will find that a market exits for almost all the commodities
known to us.
*hese commodities can !e !roadly classified into the following8
P-eBi"u) Met*9)8 'old, #iler, "latinum etc
Ot6e- Met*9); 4ickel, %luminum, (opper etc
A8-"-/*)ed C"mm"ditie); Wheat, (orn, (otton, 5ils, 5ilseeds.
S":t C"mm"ditie); (offee, #ugar etc.
E+e-8y; (rude 5il, 4atural 'as, 'asoline etc
Le*di+8 B"mm"dity eEB6*+8e;
*he goernment has now allowed national commodity exchanges, similar to the
:#7 D 4#7, to come up and let them deal in commodity deriaties in an
electronic trading enironment. *hese exchanges are expected to offer a nation,
wide anonymous, order drien@ screen !ased trading system for trading. *he
-orward Markets (ommission will regulate these exchanges.
(onsequently four commodity exchanges hae !een approed to commence
!usiness in this regard. *hey are8
Multi (ommodity 7xchange (MCF) located at Mum!ai.
4ational (ommodity and &eriaties 7xchange )td (NCDEF) located at
Mum!ai.
4ational Multi (ommodity 7xchange (NMCE) located at %hmeda!ad.
St-uBtu-e ": C"mm"dity M*-Det
Im7"-t*+Be ": G"9d;
'old is one of the most alua!le assets in an economy. It used to !e a money
metal and pu!lic memory tells that gold is uniersally accepta!le as a medium
of exchange and it is now used for its E#tore of Balue? function. %lthough the
price of gold is always on the rise and it fetches higher resale alue, in India, it
is retained for the feeling of security and status it gies rather than for sale or
with the intention of making profit or income on this inestment, 'old to the
inestor in the recent years has !ecome ery important mainly !ecause of rise in
prices due to inflation, Inestment in gold may !e in the form of gold coins,
gold !ars of gold jewelry.
Im7"-t*+Be ": Si9,e-;
#iler is sold in the form of weight in kilograms in India. )ike gold, this is a
useful hedge against inflation. It is worthwhile to note the following facts a!out
siler.
#iler has a wide range of industrial application. *here has !een no major
discoery of siler mines in the last seeral decades. *he price of siler in India
tended to !e lower than the price of siler a!road. 3ence, it was illegally
exported from India. In recent years, the price relationship has reersed.
(urrently the price of siler in India is higher than the price of siler a!road.
-or inestment purposes, siler may !e !ought in the form of !ars,Ikg !ars are
the most common. *here is a ready market for siler !ars. 3ence, siler can !e
traded ery easily.
O/>ECTIVE O. THE STUDY;
*he o!jectie is to test whether the awareness of the commodity markets
and the market is the same or not.
*he o!jectie is to determine whether people who trade in futures and
options of the stock market trade in commodity market also or not.
*he o!jectie is to analy>e the purpose of usage of the commodity market
!y the people participating in commodity market.
*he inestment attitude of the inestors while inesting in any kind of
asset.
*he o!jectie is to do the profiling of the customer.
SCOPE O. THE STUDY;
*he scope of the project is limited to commodity analysis on the
!asis of gold and siler price using correlation
*he study mainly focuses on Indian commodity market and its history.
*he working of the commodity exchanges, the commodity !eing traded,
the participants in the commodity markets.
*he need of fundamental analysis is explained and justified !y citing
from gold and siler.
*he study also !ird eye iew on glo!al commodity market and its
deelopment.
*he study coers the understand the leel of awareness of the commodity
market relatie to the share market.
Need ": t6e )tudy;
*he !asic purpose of the study from products is gold and siler. *wo different
commodities are explained as the technical factor affecting each of them is
different and the approach of predicting the price moement is different for !oth
of them.
P-iBe .ie9d);
*echnical analysis is !ased almost entirely on the analysis of price and olume.
*he fields which define a securityMs price and olume are explained !elow.
O7e+;
*his is the price of the first trade for the period. When analy>ing daily data, the
5pen is especially important as it is the consensus price.
Hi86;
*his is the highest price that the security traded during the period. It is the point
at which there were more sellers than !uyers i.e., there are always sellers willing
to sell at higher prices, !ut the 3igh represents the highest price !uyers were
willing to pay.
L"A;
*his is the lowest price that the security traded during the period. It is the point
at which there were more !uyers than sellers. i.e., there are always !uyers
willing to !uy at lower prices, !ut the )ow represents the lowest price sellers
were willing to accept.
C9")e;
*his is the last price that the security traded during the period. &ue to its
aaila!ility, the (lose is the most often used price for analysis. *he relationship
!etween the 5pen and the (lose are considered significant !y most technicians.
*his relationship is emphasi>ed in candlestick charts.
V"9ume;
*his is the num!er of shares that were traded during the period. *he relationship
!etween prices and olume is important.
O7e+ I+te-e)t;
*his is the total num!er of outstanding contracts i.e., those that hae not !een
exercised, closed, or expired of a future or option. 5pen interest is often used as
an indicator.
/id;
*his is the price a market maker is willing to pay for a security i.e., the price
you will receie if you sell.
A)D;
*his is the price a market maker is willing to accept i.e., the price you will pay
to !uy the security.
56*t i) *+*9y)i)G
Market analysis may take two distinct forms. In the first, it is a method used !y
inestors to look at the market and try to determine whether it is going up or
down, in order to make inestment decisions. In the second, it is a field used !y
marketers to analy>e the target market of their clients and determine the !est
courses of action to take to improe sales and profita!ility.
*he methods used to analy>e securities and make inestment decisions fall into
two ery !road categories8 fundamental analysis and technical analysis.
-undamental analysis inoles analy>ing the characteristics of a company in
order to estimate its alue. *echnical analysis takes a completely different
approach@ it doesnMt care one !it a!out the NalueN of a company or a
commodity.
Ty7e) ": A+*9y)i);
*here are 0 !asic types of analysis
-undamental analysis
*echnical analysis.
.u+d*me+t*9 A+*9y)i);
-undamental analysis is a way of looking at the market through economic,
social and political forces that affect supply and demand. While fundamental
analysis seres as a guide to an inestor in stock selection. While the
fundamental analyst !eliees that the market is /. percent logical and 2.
percent psychological.
/ASIC O/>ECTIVES O. .UNDAMENTAL ANALYSIS
-undamental analysis is performed on historical and present data, !ut with the
goal of making financial forecasts. *here are seeral possi!le o!jecties8
*o conduct a company stock aluation and predict its pro!a!le price
eolution,
*o make a projection on its !usiness performance,
*o ealuate its management and make internal !usiness decisions,
*o calculate its credit risk.
TeB6+iB*9 A+*9y)i);
*echnical analysis is the study of time and price moement. In one word,
technical analysis equals to charts. It is the forecasting of future price
moements !ased on an examination of past price moements. *echnical
analysis seres as a guide to decide on the timing of a stock purchase or sale.
*echnical analyst assumes that it is /. percent psychological and 2. percent
logical.
EE*m79e;
In a shopping mall, a fundamental analyst would go to each store, study the
product that was !eing sold, and then decide whether to !uy it or not. :ut in a
technical analyst would sit on a !ench in the mall and watch people go into the
stores. &isregarding the intrinsic alue of the products in the store, the technical
analystMs decision would !e !ased on the patterns or actiity of people going to
each store.
Hi)t"-y
*he term Ntechnical analysisN is a complicated sounding name for a ery !asic
approach to inesting. #imply put, technical analysis is the study of prices, with
charts !eing the primary tool.
*he roots of modern,day technical analysis stem from the &ow *heory
deeloped around 2/.. !y (harles &ow. #temming either directly or indirectly
from the &ow *heory, these roots include such principles as the trending nature
of prices, prices discounting all known information, confirmation and
diergence, olume mirroring changes in price, and support6resistance. %nd of
course, the widely followed &ow Aones Industrial %erage is a direct offspring
of the &ow *heory.
(harles &owMs contri!ution to modern,day technical analysis cannot !e
understated. 3is focus on the !asics of security price moement gae rise to a
completely new method of analy>ing the markets.
/ASIC O/>ECTIVES O. TECHNICAL ANALYSIS
Market alue is determined !y the interaction of supply and demand.
#upply and demand are influenced !y a ariety of factors, !oth rational
and irrational.
*hese include fundamental factors as well as psychological factors.
#hifts in demand and supply !ring a!out changes in trends.
#hifts in demand and supply can !e detected with the help of charts of
market action.
#ome chart patterns tend to repeat themseles.
:ecause of the persistence of trends and patterns, analysis of past market
data can !e used to predict future price !ehaior.
Di::e-e+Be) betAee+ TeB6+iB*9 A+*9y)i) *+d .u+d*me+t*9 A+*9y)i)
*7(34I(%) %4%)+#I# -<4&%M74*%) %4%)+#I#
It mainly seeks to predict short,term
price moements.
It tries to esta!lish long,term alues
It focuses mainly on internal market
data, particularly price and olume
data.
It focuses on fundamental factors
relating to the economy, the industry,
and the firm.
*echnical analysis appeals mostly to
short,term traders.
-undamental analysis appeals
primarily to long,term inestors.
CHARTS;
*he !asic tool in technical analysis is moement in prices measured !y charts. It
is for this reason that the technical analyst is sometimes called the 9(hartist;.
% graph of the price moements of a gien security oer a gien time period,
sometimes along with olume data. (harts are the main tool that technical
analysts use in order to plot data and predict prices. *echnical analysts may use
seeral different types of charts in order to conduct their tests and look for
patterns in the data, including line charts , !ar charts, and candlestick charts . -or
example, a chart may show a commodities price moement oer a one,year
period, where each point on the graph represents the closing price for each day
the commodity is traded8
Ty7e) ": C6*-t);
2. )ine (harts
0. :ar (harts
J. (andlestick (harts

Li+e C6*-t ;
% 9i+e B6*-t or 9i+e 8-*76 is a type of graph, which displays information as a
series of data points connected !y straight line segments. It is a !asic type of
chart common in many fields. It is an extension of a scatter graph, and is created
!y connecting a series of points that represent indiidual measurements with
line segments. % line chart is often used to isuali>e a trend in data oer
interals of time, thus the line is often drawn chronologically.
%s I see from the chart a!oe, a line chart can gie the reader a fairly good idea
of where the price of an asset has traeled oer a gien time frame.
/*- C6*-t);
*he !ar chart, one of the simplest and most commonly used tool of
technical analysis, depicts the daily price range along with the closing price. In
addition, it may show the daily olume of transactions. *he upper end of each
!ar represents the day?s highest price and the lower end the day?s lowest price.
#tandard !ar charts are commonly used to coney price actiity into an easily
reada!le chart. <sually four elements make up a !ar chart, the 5pen, 3igh,
)ow, and (lose for the trading session6time period. % price !ar can represent
any time frame the user wishes, from 2 minute to 2 month. *he total ertical
length6height of the !ar represents the entire trading range for the period. *he
top of the !ar represents the highest price of the period, and the !ottom of the
!ar represents the lowest price of the period. *he 5pen is represented !y a small
dash to the left of the !ar, and the (lose for the session is a small dash to the
right of the !ar. :elow is a standard !ar chart example.

O7e+; *he little hori>ontal line on the left is the opening price
Hi86; *he top of the ertical line defines the highest price of the time period
L"A; *he !ottom of the ertical line defines the lowest price of the time period
C9")e; *he little hori>ontal line on the right is the closing price
C*+d9e)tiBD C6*-t);
(andlestick charts are much more isually appealing than a standard two,
dimensional !ar chart. %s in a standard !ar chart, there are four elements
necessary to construct a candlestick chart, the 5"74, 3I'3, )5W and
()5#I4' price for a gien time period. :elow are examples of candlesticks
and a definition for each candlestick component8
Hi)t"-y ": C*+d9e)tiBD
(andlestick charts are on record as !eing the oldest type of charts used
for price prediction. In fact, during this era in Aapan, Munehisa 3omma !ecome
a legendary rice trader and gained a huge fortune using candlestick analysis. 3e
is said to hae executed oer 2.. consecutie winning traders.
*he candlesticks themseles and the formations they shape were gie colorful
names !y the >APANESE TRADERS! &ue in part to the military enironment
of the Aapanese feudal system during this era, candlestick formations deeloped
names such as 9counter attack lines; and the 9adancing three soldiers;. Aust as
skill, strategy, and psychology are important in !attle, so too are they important
elements when in the midst of trading !attle
(andlesticks are formed using the open, high, low and close.
If the close is a!oe the open, then a hollow candlestick (usually displayed as
white) is drawn.
If the close is !elow the open, then a filled candlestick (usually displayed as
!lack) is drawn.
*he hollow or filled section of the candlestick is called the 9real !ody; or
!ody.
*he thin lines poking a!oe and !elow the !ody display the high6low range
and are called shadows.
*he top of the upper shadow is the 9high;.
*he !ottom of the lower shadow is the 9low;.
COMMON CANDLESTICK TERMINOLOGY
*he following is a list of some indiidual candlestick terms. It is important to
reali>e that many formations occur within the context of prior candlesticks.
What follows is merely a definition of terms, not formations.
*he Black (andlestick ,, when the close is lower than the open.
*he White (andlestick ,, when the close is higher than the open.
*he Shaven Head ,, a candlestick with no upper shadow.
*he Shaven Bottom ,, a candlestick with no lower shadow.
Spinning Tops -- candlesticks with small real bodies, and when appearing
within a sideways choppy market, they represent equili!rium !etween the !ulls
and the !ears. *hey can !e either white or black.
Doji Lines ,, hae no real bod, !ut instead hae a hori>ontal line. *his
represents when the 5pen and (lose are the same or ery close. *he length of
the shadow can ary.
*$74&
What is *$74&O
*here are two components to trend, direction and duration. Markets trend in
three directions, up, down and sideways. Markets do not moe consistently in
one direction, !ut tend to !e erratic. Within this erratic !ehaior a trend will !e
present. *rends are characteri>ed !y a series of peaks and troughs. %n uptrend is
a series of rising peaks and troughs, a downtrend shows a series of descending
peaks and troughs. % sideways tend is a series of hori>ontal peaks and troughs,
with prices moing within a range, failing to make new highs at the top of the
price range and failing to make new lows at the !ottom of the price range.
*rend duration is also made up of three time periods@ major, intermediate and
minor. *he major trend will hae a duration of six to eight months or longer and
is !est illustrated !y weekly and monthly !ar charts. Within the major trend
significant corrections or reersals of trend will !e present@ these would !e
intermediate and minor trends within the major trend. *he intermediate trend
lasts from three weeks to three months, and the minor trend is anything less,
from two to three weeks in duration
T6ey *-e t6-ee ty7e) ": t-e+d);
2. <p trend
0. &own trend
J. #ideways
UPTREND;
It descri!es the price moement of a financial asset when the oerall direction is
upward. % formal uptrend is when each successie peak and trough is higher
than the ones found earlier in the. 7ach successie peak and trough is higher
than the ones found earlier in the trend
*he goal of most technical traders is to identify a strong uptrend and to profit
from it until it reerses. #elling an asset once it has failed to create a new peak
or trough is one of the !est ways to aoid the large losses that can result from a
reersed trend. I will also draw trend lines to identify an uptrend and use this
tool as a guide for when to sell as it can also !e an early indication of a trend
reersal
4otice how each successie peak and trough is located a!oe the preious
ones. -or example, the peak at "oint P is higher than the peak at "oint 0. *he
uptrend will !e deemed !roken if the next low on the chart falls !elow "oint I.
DO5NTREND
It descri!es the price moement of a financial asset when the oerall direction is
downward. % formal downtrend occurs when each successie peak and
trough is lower than the ones found earlier in the trend many traders seek to
aoid downtrends !ecause they can drastically affect the alue of any
inestment. % downtrend can last for minutes, days, weeks, months or een
years so identifying a downtrend early is ery important. 5nce a downtrend has
!een esta!lished a trader should !e ery cautious a!out entering into any new
long positions

4otice how each successie peak and trough is lower than the preious one. -or
example, the low at "oint J is lower than the low at "oint 2. *he downtrend will
!e deemed !roken once the price closes a!oe the high at "oint P.
SIDE5AYS TREND;
It descri!es the hori>ontal price moement that occurs when the forces of supply
and demand are nearly equal. % sideways trend is often regarded as a period of
consolidation !efore the price continues in the direction of the preious moe. %
sideways price trend is also commonly known as a 93ori>ontal *rends;.
#ideways trend is generally a result of the price traeling !etween strong leels
of support and resistance. It is not uncommon to see a hori>ontal trend dominate
the price action of a specific asset for a prolonged period !efore starting a
moe higher or lower. :rief consolidation is often needed during large price
runs, as it is nearly impossi!le for such large price moes to sustain themseles
oer the longer term.
Su77"-t *+d Re)i)t*+Be
#upport and resistance represent key junctures where the forces of
supply and demand meet. In the financial markets, prices are drien !y
excessie supply means down and demand means up. #upply is synonymous
with !earish, !ears and selling. &emand is synonymous with !ullish, !ulls and
!uying. *hese terms are used interchangea!ly throughout this and other articles.
%s demand increases, prices adance and as supply increases, prices decline.
When supply and demand are equal, prices moe sideways as !ulls and !ears
slug it out for control #upport and resistance is one of the most widely used
concepts in trading. #trangely enough, eeryone seems to hae their own idea
on how you should measure support and resistance.
)et?s just take a look at the !asics 8
:y this figure i can see, this >ig>ag pattern is making its way up !ull market.
When the market moes up and then pulls !ack, the highest point reached
!efore it pulled !ack is now resistance.
%s the market continues up again, the lowest point reached !efore it started !ack
is now support. In this way resistance and support are continually
formed as the market oscillates oer time. *he reerse of course is
true of the downtrend!
!rinciples o" Support and #esistance$
When the market passes through resistance, that resistance now !ecomes
support.
*he more often price tests a leel of resistance or support without
!reaking it the stronger the area of resistance or support is.
"rices are said to remain in a Econgestion >one? as long as they fluctuate
in narrow ranges within a support and resistance leel. *he direction of
!reakout from a congestion >one cannot !e predicted in adance.
*he higher the olume accompanying the confirmation of a support or
resistance leel, the more its significance.
#upport and resistance leels repeat their effectieness time and again,
een if separated !y many years.
TREND LINES
*rend )ines are an important tool in technical analysis for !oth trend
identification and confirmation. % trend line is a straight line that connects two
or more price points and then extends into the future to act as a line of support
or resistance. Many of the principles applica!le to support and resistance leels
can !e applied to trend lines as well. It is important that understand all of the
concepts presented in #upport and $esistance !efore I continue. *rend lines can
offer great insight, !ut if I used improperly, It can also produce false signals.
5ther items , such as hori>ontal support and resistance leels or peak,and,
trough analysis , should !e employed to alidate trend line !reaks. While trend
lines hae !ecome a ery popular aspect of technical analysis, they are merely
one tool for esta!lishing, analy>ing, and confirming a trend. *rend lines should
not !e the final ar!iter, !ut should sere merely as a warning that a change in
trend may !e imminent. :y using trend line !reaks for warnings, inestors and
traders can pay closer attention to other confirming signals for a potential
change in trend.
T6ey tA" t-e+d 9i+e)
2. <p trend line
0. &own trend line
U7t-e+d Li+e;
%n uptrend line has a positie slope and is formed !y connecting two of
more low points. *he second low must !e higher than the first for the line to
hae a positie slope. <ptrend lines act as support and indicate that net,demand
(demand less supply) is increasing een as the price rises. % rising price
com!ined with increasing demand is ery !ullish and shows a strong
determination on the part of the !uyers. %s long as prices remain a!oe the
trend line, the uptrend is considered solid and intact. % !reak !elow the uptrend
line indicates that net,demand has weakened and a change in trend could !e
imminent.
D"A+t-e+d Li+e;
% downtrend line has a negatie slope and is formed !y connecting two
or more high points. *he second high must !e lower than the first for the line to
hae a negatie slope. &owntrend lines act as resistance, and indicate that net,
supply (supply less demand) is increasing een as the price declines. %
declining price com!ined with increasing supply is ery !earish and shows the
strong resole of the sellers. %s long as prices remain !elow the downtrend line,
the downtrend is considered solid and intact. % !reak a!oe the downtrend line
indicates that net,supply is decreasing and a change of trend could !e imminent
CHART PATTERNS;
% chart pattern is a pattern that is formed within a chart when prices are
graphed. In stock and commodity markets trading, chart pattern studies play a
large role during technical analysis. When data is plotted there is usually a
pattern which naturally occurs and repeats oer a period of time. (hart patterns
are used as either reersal or continuation signals.
Ty7e) ": C6*-t P*tte-+);
#ymmetrical *riangle
%scending *riangle
&escending *riangle
Wedges
-lags
"ennants
&ou!le *op
&ou!le :ottom
3ead and #houlders
Symmet-iB*9 T-i*+89e;
*he symmetrical triangle is formed when the market makes lower
highs and higher lows and is commonly associated with directionless markets as
the contraction of the market range indicates that neither the !ulls nor the !ears
are in control. If this pattern forms in an uptrend then it is considered a
continuation pattern if the market !reaks out to the upside and a reersal pattern
if the market !reaks to the downside. #imilarly if the pattern forms in a
downtrend it is considered a continuation pattern if the market !reaks out to the
downside and a reersal pattern if the market !reaks to the upside.
Ty7e) ": Symmet-iB*9;
<p *rend
&own *rend
#ymmetrical triangles can !e characteri>ed as areas of indecision. %
market pauses and future direction is questioned. *ypically, the forces of
supply and demand at that moment are considered nearly equal. %ttempts to
push higher are quickly met !y selling, while dips are seen as !argains. 7ach
new lower top and higher !ottom !ecomes more shallow than the last, taking on
the shape of a sideways triangle. 7entually, this indecision is met with resole
and usually explodes out of this formation. $esearch has shown that
symmetrical triangles oerwhelmingly resole themseles in the direction of the
trend. With this in mind, symmetrical triangles in my opinion, are great patterns
to use and should !e traded as continuation patterns.
ASCENDING TRIANGLE;
*he ascending triangle is a ariation of the symmetrical triangle. %scending
triangles are generally considered !ullish and are most relia!le when found in an
uptrend. *he top part of the triangle appears flat, while the !ottom part of the
triangle has an upward slant. In ascending triangles, the market !ecomes
oer!ought and prices are turned !ack. :uying then re,enters the market and
prices soon reach their old highs, where they are once again turned !ack.
:uying then resurfaces, although at a higher leel than !efore. "rices eentually
!reak through the old highs and are propelled een higher as new !uying comes
in. (%s in the case of the symmetrical triangle, the !reakout is generally
accompanied !y a marked increase in olume.
DESCENDING TRIANGLE
*he descending triangle, also a ariation of the symmetrical triangle, is
generally considered to !e !earish and is usually found in downtrends. <nlike
the ascending triangle, this time the !ottom part of the triangle appears flat. *he
top part of the triangle has a downward slant. "rices drop to a point where they
are oersold. *entatie !uying comes in at the lows, and prices perk up. *he
higher price howeer attracts more sellers and prices re,test the old lows.
:uyers then once again tentatiely re,enter the market. *he !etter prices though,
once again attract een more selling. #ellers are now in control and push
through the old lows of this pattern, while the preious !uyers rush to dump
their positions.
5EDGES;
*he wedge formation is also similar to a symmetrical triangle in appearance, in
that they hae conerging trend lines that come together at an apex. 3oweer,
wedges are distinguished !y a noticea!le slant, either to the upside or to the
downside.
% falling wedge is generally considered !ullish and is usually found in up
trends. :ut they can also !e found in downtrends as well. *he implication
howeer is still generally !ullish. *his pattern is marked !y a series of lower
tops and lower !ottoms.
% rising wedge is generally considered !earish and is usually found in
downtrends. *hey can !e found in up trends too, !ut would still generally !e
regarded as !earish. $ising wedges put in a series of higher tops and higher
!ottoms.
.LAGS AND PENNANTS;
-lags and pennants can !e categori>ed as continuation patterns. *hey usually
represent only !rief pauses in a dynamic market. *hey are typically seen right
after a !ig, quick moe. *he market then usually takes off again in the same
direction. $esearch has shown that these patterns are some of the most relia!le
continuation patterns.
:ullish flags are characteri>ed !y lower tops and lower !ottoms, with the
pattern slanting against the trend. :ut unlike wedges, their trend lines run
parallel.
:earish flags are comprised of higher tops and higher !ottoms. N:earN flags
also hae a tendency to slope against the trend. *heir trend lines run parallel as
well.
"ennants look ery much like symmetrical triangles. :ut pennants are typically
smaller in si>e and duration.
DOU/LE TOP
% dou!le top is a reersal pattern that is formed after there is an extended moe
up. *he 9tops; are peaks which are formed when the price hits a certain leel
that can?t !e !roken. %fter hitting this leel, the price will !ounce off it slightly,
!ut then return !ack to test the leel again. If the price !ounces off of that leel
again, then you hae a &5<:)7 topQ
In this chart the two peaks or 9tops; were formed after a strong moe up. *he
0nd top was not a!le to !reak the high of the 2st top. *his is a strong sign that a
reersal is going to occur !ecause it is telling us that the !uying pressure is just
a!out finished. With dou!le tops, we would place our entry order !elow the
neckline !ecause we are anticipating a reersal of the uptrend.
In this chart price !reaks the neckline and makes a nice moe down. 'enerally,
dou!le tops are a trend reersal formation. +ou?ll want to look for these after
there is a strong uptrend.
DOU/LE /OTTOM
&ou!le !ottoms are also trend reersal formations, !ut this time we are looking
to go long instead of short. *hese formations occur after extended downtrends
when two alleys or 9!ottoms; hae !een formed.
In a!oe chart, after the preious downtrend, the price formed two alleys
!ecause it wasn?t a!le to go !elow a certain leel. *he 0nd !ottom wasn?t a!le
to significantly !reak the 2st !ottom. *his is a sign that the selling pressure is
a!out finished, and that a reersal is a!out to occur. In this situation, we would
place an entry order a!oe the neckline.
*he price !reaks the neckline and makes a nice moe up. Aust like dou!le tops,
dou!le !ottoms are also trend reersal formations. +ou?ll want to look for
these after a strong downtrend.
HEAD AND SHOULDERS
% head and shoulders pattern is also a trend reersal formation. It is formed !y a
peak (shoulder), followed !y a higher peak (head), and then another lower peak
(shoulder). % 9neckline; is drawn !y connecting the lowest points of the two
troughs. *he slope of this line can either !e up or down. In my experience, when
the slope is down, it produces a more relia!le signal.
In this example, we can isi!ly see the head and shoulders pattern. *he head is
the 0nd peak and is the highest point in the pattern. *he two shoulders also form
peaks !ut do not exceed the height of the head.
With this formation, we look to make an entry order !elow the neckline. We can
also calculate a target !y measuring the high point of the head to the neckline.
*his distance is approximately how far the price will moe after it !reaks the
neckline.
+ou can see that once the price goes !elow the neckline it makes a moe that is
a!out the si>e of the distance !etween the head and the neckline.
REVERSE HEAD AND SHOULDERS
*he name speaks for itself. It is !asically a head and shoulders formation,
except this time it?s in reerse. % alley is formed (shoulder), followed !y an
een lower alley (head), and then another higher alley (shoulder). *hese
formations occur after extended downward moements.
3ere you can see that this is just like a head and shoulders pattern, !ut it?s
flipped upside down. With this formation, we would place a long entry order
a!oe the neckline. 5ur target is calculated just like the head and shoulders
pattern. Measure the distance !etween the head and the neckline, and that is
approximately the distance that the price will moe after it !reaks the neckline.
+ou can see that the price moed up nicely after it !roke the neckline. W7
know you?re thinking to yourself, 9the price kept moing een after it reached
the target.;
If your target is hit, then !e happy with your profits. 3oweer, there are
strategies where you can lock in some of your profits and still keep your trade
open in case the price continues to moe your way.
NECKLINE
% leel of support or resistance found on a head and shoulders pattern that is
used !y traders to determine strategic areas to place orders. 7ach peak of a
regular head and shoulders pattern falls toward a support leel, also known as a
neckline, !efore it rises to create the next peak. % moe !elow the neckline (in
the case of a head and shoulders top) is used !y traders as a signal of a reersal
of the current uptrend.
It is possi!le to see the slope of a neckline !e drawn at a slight angle rather than
hori>ontal like the one shown in the image a!oe. 3oweer, regardless of its
slope, a moe !elow the neckline of a regular head and shoulders pattern is
always used as a signal of a moe lower.
In the case of an inerse head and shoulders, the neckline is found as a leel of
resistance that has preented the price from heading higher. % moe !eyond the
neckline in this case would !e used to signal the start of an uptrend
INDICATORS AND OSCILLATORS;
M",i+8 A,e-*8e)
I+t-"duBti"+
Moing aerages are one of the most popular and easy to use tools aaila!le to
the technical analyst. *hey smooth a data series and make it easier to spot
trends, something that is especially helpful in olatile markets. *hey also form
the !uilding !locks for many other technical indicators and oerlays.
*he two most popular types of moing aerages are the #imple Moing
%erage (#M%) and the 7xponential Moing %erage (7M%). *hey are
descri!ed in more detail !elow. Mean alue, as calculated oer a rolling
preious period of fixed length.
Sim79e M",i+8 A,e-*8e SMA)
% simple moing aerage is formed !y computing the aerage (mean) price of a
security oer a specified num!er of periods. While it is possi!le to create
moing aerages from the 5pen, the 3igh, and the )ow data points, most
moing aerages are created using the closing price. -or example8 a I,day
simple moing aerage is calculated !y adding the closing prices for the last I
days and diiding the total !y I.
*he chart a!oe is a plot that contains the data sequence in the ta!le. *he simple
moing aerage !egins on day 2. and continues.
*his simple illustration highlights the fact that all moing aerages are lagging
indicators and will always !e N!ehindN the price. *he price of 7= is trending
down, !ut the simple moing aerage, which is !ased on the preious 2. days of
data, remains a!oe the price. If the price were rising, the #M% would most
likely !e !elow. :ecause moing aerages are lagging indicators, they fit in the
category of trend following indicators. When prices are trending, moing
aerages work well. 3oweer, when prices are not trending, moing aerages
can gie misleading signals.
EE7"+e+ti*9 M",i+8 A,e-*8e
7xponential Moing %erages can !e specified in two ways , as a percent,
!ased 7M% or as a period,!ased 7M%. % percent,!ased 7M% has a
percentage as itMs single parameter while a period,!ased 7M% has a parameter
that represents the duration of the 7M%.
*he formula for an exponential moing aerage is8
7M%(current) G ( ("rice(current) , 7M%(pre) ) x Multiplier) R 7M%(pre)
RELATIVE STRENGTH INDEF
$#I means $elatie #trength Index, it identifies oer!ought and oersold
conditions in the market. It is also scaled from . to 2... *ypically, readings
!elow J. indicate oersold, while readings oer L. indicate oer!ought.
O,e-)"9d
$#I when $#I dropped !elow J., it correctly identified an oersold market.
%fter the drop, the price quickly shot !ack up.
$#I is a ery popular tool !ecause it can also !e used to confirm trend
formations. % trend is forming, take a quick look at the $#I and look at whether
it is a!oe or !elow I.. If you are looking at a possi!le uptrend, then make sure
the $#I is a!oe I.. If you are looking at a possi!le downtrend, then make sure
the $#I is !elow I..
O,e-b"u86t
In the !eginning of the chart a!oe, we can see that a possi!le uptrend was
forming. *o aoid fake outs, we can wait for $#I to cross a!oe I. to confirm
our trend. #ure enough, as $#I passes a!oe I., it is a good confirmation that
an uptrend has actually formed.
DIVERGENCE;
&iergence is nothing !ut !uy and sell signals can also !e generated !y
looking for positie and negatie diergences !etween the $#I and the
underlying stock. -or example, $#I moes upward or downward direction then
market slightly moes in opposite direction.
RSI POSITIVE DIVERGENCE
NEGATIVE DIVERGENCE
MACD
Moing %erage (onergence&iergence. *echnical analysis term for the
crossing of two exponentially smoothed moing aerages.
M%(& is an acronym for Moing %erage (onergence &iergence. *his
tool is used to identify moing aerages that are indicating a new trend, whether
it?s !ullish or !earish. It continuously conerges and dierges away from the
hori>ontal reference line. It is constructed !y taking the difference of the ratio of
short term and the long term moing aerage. *he points o!tained are plotted
against a hori>ontal reference line. *he reference line represents the points
where the two 7M%s hae identical alues. -rom the moement of the M%(&
indicator it can !e known, whether the shorter term moing aerage is a!oe or
!elow the longer term moing aerage.
With an M%(& chart, you will usually see three num!ers that are used for its
settings.
*he first is the num!er of periods that is used to calculate the faster
moing aerage.
*he second is the num!er of periods that are used in the slower moing
aerage.
%nd the third is the num!er of candlestick that is used to calculate the
moing aerage of the difference !etween the faster and slower moing
aerages.
STOCHASTIC OSCILLATOR
#tochastic is a price elocity technique !ased on the theory that as prices
increase, closing prices hae a tendency to !e eer nearer to the peaks reached
during that period. #imilarly, as prices tend to fall, closing prices tend to !e
closer and closer to the troughs reached during that period.
In technical analysis of securities trading, the stochastic oscillator is a
momentum indicator that uses support and resistance leels &r. 'eorge )ane
promoted this indicator in the 2/I.s. *he term stochastic refers to the location
of a current price in relation to its price range oer a period of time. *his
method attempts to predict price turning points !y comparing the closing price
of a security to its price range.
*he indicator is usually calculated as8
Met6"d ": St"B6*)tiB;
#tochastic tells us when the market is oer!ought or
oersold. #tochastic are scaled from . to 2... When the stochastic lines are
a!oe 1. (the !lack dotted line in the chart !elow), then it means the market is
oer!ought. When the stochastic lines are !elow 0. (the !lack dotted line), then
it means that the market is oersold. We !uy when the market is oersold, and
we sell when the market is oer!ought.
)ooking at the chart a!oe, we can see that the stochastics has !een showing
oer!ought conditions for quite some time.
St"B6*)tiB P")iti,e Di,e-8e+Be
% !ullish diergence occurs when the security?s price makes a low,
then corrects moing higher, and su!sequently, reaches a lower low. %t the
same time, corresponding !ottoms of the C= line makes a low followed !y a
higher !ottom.
St"B6*)tiB Ne8*ti,e Di,e-8e+Be;

% !earish diergence occurs when the security?s price makes a high then
corrects moing lower and su!sequently reaches a higher high. %t the same
time, corresponding dealers of the C= line make a high followed !y a lower
high.
-I:54%((I #7$I7#8
*rend line !etween two extreme points, a trough and opposing peak. % series of
nine hori>ontal lines are drawn intersecting the trend line at the -i!onacci leels
of ...C, 0J.SC, J1.0C, I.C, S2.1C, 2..C, 2S2.1C, 0S2.1C, and P0J.SC.
#ome of the lines will pro!a!ly not !e isi!le !ecause they will !e off the scale.
%fter a significant price moe either up or down, prices will often retrace a
significant portion of the original moe. %s prices retrace, support and
resistance leels often occur at or near the -i!onacci $etracement leels.
In the following chart of 'old, -i!onacci series lines were drawn !etween a
major trough and peak.
ELLIOTT 5AVE THEORY;
% technical analysis technique pu!lished !y $alph 7lliott, which
claims that stock markets follow a pattern of fie waes up and three waes
down 7lliott explained that the upward and downward swings of the mass
psychology always showed up in the same repetitie patterns, which were then
diided into patterns he called NwaesN. 3e needed to claim this o!seration and
so he came up with a super original name8 *he 7lliott Wae *heory.
T6e 3 0 < 5*,e P*tte-+)
Mr. 7lliott showed that a trending market moes in what he calls a I,J wae
pattern. *he first I,wae pattern is called impulse waes and the last J,wae
pattern is called correctie waes.
3ere is a short description of what happens during each wae. I am going to use
stocks for my example since stocks is what Mr. 7lliott used !ut it really doesn?t
matter what it is. It can easily !e currencies, !onds, gold, oil, or *ickle Me 7lmo
dolls. *he important thing is the 7lliott Wae *heory can also !e applied to the
foreign exchange market.
5*,e'
*he stock makes its initial moe upwards. *his is usually caused !y a relatiely
small num!er of people that all of the sudden feel that the price of the stock is
cheap so it?s a perfect time to !uy. *his causes the price to rise.
5*,e%
%t this point enough people who were in the original wae consider the stock
oeralued and take profits. *his causes the stock to go down. 3oweer, the
stock will not make it to its preious lows !efore the stock is considered a
!argain again.
5*,e<
*his is usually the longest and strongest wae. *he stock has caught the
attention of the mass pu!lic. More people find out a!out the stock and want to
!uy it. *his causes the stock?s price to go higher and higher. *his wae usually
exceeds the high created at the end of wae 2.
5*,e=
"eople take profits !ecause the stock is considered expensie again. *his wae
tends to !e weak !ecause there are usually more people that are still !ullish on
the stock and are waiting to 9!uy on the dips;.
5*,e3
*his is the point that most people get on the stock, and is most drien !y
hysteria. +ou usually start seeing the (75 of the company on the front page of
major maga>ines as the "erson of the +ear. "eople start coming up with
ridiculous reasons to !uy the stock and try to choke you when you disagree with
them. *his is when the stock !ecomes the most oerpriced. (ontrarians start
shorting the stock which starts the %:( pattern.
THE DO5 THEORY;
*he &ow *heory, originally propounded !y (harles &ow in2/.., is one
of the oldest methods of identifying trends in the stock market. *he !asic
principles of technical analysis originated from this theory. In a nutshell, this
theory seeks to study the major moements in the market with a iew to
esta!lish trends. <ntil a reersal occurs, a trend is assumed to exist. It should !e
noted that the &ow *heory only descri!es the direction of market trends, and
does not attempt to forecast future moements or estimate either the duration or
the si>e of such market trends.
*he theory uses the !ehaior of the stock market as a !arometer of
!usiness conditions, rather than as a !asis for forecasting stock prices
themseles. It is assumed that most of the time a majority of the stocks follow
the underlying market trend. *herefore, the postulates of the theory were framed
with reference to market indices, specifically constructed to measure market
trends.
TeB6+iB*9 Out9""D
%fter a long period of consolidation after the run up to H2,..S6o> in -e!ruary
0../, prices hae !roken higher out of the triangle and are in the process of
setting fresh all time highs. %t present prices do not look too extended and the
stochastic indicators are looking strong too. *he strong rally in %ugust 0..L,
went from HSP.6o> to H2,.J0.I.6o>, a moe of close to HP..6o>, so with this
latest !ull,run starting around HS1.6o> a similar run would take prices towards
H2,2..6o>. %s far as pull !acks are concerned, the uptrend line at H/L.6o>
should proide support as should the H2,...6o> area. % moe !elow the uptrend
line would then suggest a possi!le pull !ack to around the H/..6o> area, where
the S. week moing aerage lies. *he stochastics did recently cross lower !ut
failed to moe down too far and hae now crossed higher. % similar situation
was seen in Aanuary 0../ and after the stochastics crossed higher again price
went on to rise H0..6o>. With prices !reaking into new high ground, we would
target H2,0I.6o> as the ne xt major upside target. (%fter the moe a!oe H1I.6o>
prices clim!ed 02.IC, so a similar percentage moe from H2,.J0.I.6o> is
H2,0IP6o>). 5erall we expect 'old to extend its gains, !ut once the next peak
has !een esta!lished another long period of consolidation is likely to follow as
the market adjusts to the price rise.
."-eB*)t ? C"+B9u)i"+
'old is going through a ery interesting time, !ut there are a
multitude of factors influencing the price some of which are quite
contradictory such as the presence of deflation and the fear of
inflation. We also hae an uneasy feeling that after the near
catastrophic eents seen oer the past twele months, the sharp
recoery seen since March seems too good to !e true and for that
reason it pro!a!ly is. Indeed gien the massie goernments?
stimulus packages and !ailouts mainly paid for with !orrowed
and printed money, there is considera!le uncertainty as to what
lies ahead. *he glo!al im!alance !etween those countries that
hae massie dollar de!t and those with huge dollar reseres is
also coming to a head as the <# seems set on a path to dealue
the dollar !y means of quantitatie easing. In addition, the weak
dollar is prompting competitie currency dealuation and with
numerous former Ehard? currencies trying to lose alue, it is not
surprising that faith in fiat currencies is waning and those with
money are looking to diersify into assets with intrinsic alue, of
which 'old and other commodities are top of the list. Indeed this
might well !e what is driing !ase metals higher, een though
demand is weak and stockpiles are mounting. *he fact <# dollar
creditors are talking a!out the need for another glo!al resere
currency shows that they are losing faith in the dollar.

/I/LOGRAPHY
/""D) Aut6"-)
7ssential technical analysis )eigh #teens
*echnical analysis Aack &. #chwager
'etting #tarted in (hart "atterns *homas 4. :ulkowski
*echnical analysis in commodities "erry A. =aufman
5eb)ite)
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