MYSORE UNIVERSITY
Mysore
A SEMINAR REPORT ON
Submitted to:
Mrs. PREETHI M
FACULTY
Department Of MBA.
TTL COLLEGE OF BUISNESS ADMINISTRATION
Submitted By
GOVARDHAN .P.K
KARTHIK.S
KARTHIK KUMAR.C.S
Department Of MBA.
TTL COLLEGE OF BUISNESS ADMINISTRATION
Mysore-57000
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INDEX
1) INTRODUCTION
2) HISTORY
3) DEFINITION
4) PRINICIPLES
5) USES
7) CONCLUSION
8) CHARTS
9) BIBILOGRAPHY
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INTRODUCTION
Technical analysis is a financial markets technique that claims the ability to forecast the
future direction of security prices through the study of past market data, primarily price
and volume. In its purest form, Technical analysis considers only the actual price and
volume behavior of the market or instrument, on the assumption that price and volume
are the two most relevant factors in determining the future direction and behavior of a
particular stock or market. Technical analysts may employ models and trading rules
based, for example, on price and volume transformations, such as the relative strength
index, moving averages, regressions, inter-market and intra-market price
correlations, cycles or classically through recognition of chart patterns.
Technical analysis is widely used among traders and financial professionals, but is
considered in academia to be pseudoscience. Academics such as Eugene Fama say the
evidence for technical analysis is sparse and is inconsistent with the weak form of the
generally-accepted efficient market hypothesis. Economist Burton Malkiel argues,
“Technical analysis is an anathema to the academic world." He further argues that under
the weak form of the efficient market hypothesis, "...you cannot predict future stock
prices from past stock prices."
However, there are also many stock traders who proclaim technical analysis not as a
science for predicting the future but instead as a valuable tool to identify favorable
trading opportunities and trends. The assumption is that all of the fundamental
information and current market opinions are already reflected in the current price and
when viewed in conjunction with past prices often reveals recurring price and volume
patterns that provide clues to potential future price movement.
In the foreign exchange markets, its use may be more widespread than fundamental
analysis. While some isolated studies have indicated that technical trading rules might
lead to consistent returns in the period prior to 1987, most academic work has focused on
the nature of the anomalous position of the foreign exchange market. It is speculated that
this anomaly is due to central bank intervention.
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HISTORY
The principles of technical analysis derive from the observation of financial markets over
hundreds of years. The oldest known example of technical analysis was a method
developed by Homma Munehisa during early 18th century which evolved into the use of
candlestick techniques, and is today a main charting tool.
Technical analysis as a tool of investment for the average investor thrived in the late
nineteenth century when Charles Dow, then editor of the Wall Street Journal, proposed
the Dow Theory. He recognized that the movement is caused by the action/reaction of the
people dealing in stocks rather than the news in itself.
Walter Deemer was one of the technical analysts of that time. He started at Merrill Lynch
in New York as a member of Bob Farrell'sdepartment. Then when the legendary Gerry
Tsai moved from Fidelity to found the Manhattan Fund in 1966, Deemer joined him. Tsai
used to consult him before every major block trade, at the start of a time when large
volume institutional trading became the norm and the meal ticket for brokers. Deemer,
could recreate market history on his charts and cite statistics. He maintained contact with
the group of other pros around then, who shared their insights with each other in a
collegial confidence worthy of the priesthood.
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DEFINITION
We can define technical analysis as a study of the stock market considering factors
Related to the supply and demand of stocks. Technical analysis doesn’t look at underlying
earnings potential of a company while evaluating stocks {unlike fundamental analysis}.
It uses charts and computer programs to study the stock’s trading volume and price
movements in the hope of identifying a trend. In fact the decision made on the basis of
technical analysis is done only after inferring a trend and judging the future movement of
the stock on the basis of the trend. Technical analysis assumes that the market is efficient
and the price has already taken into consideration the other factors related to the company
and the industry. It is because of this assumption that many think technical analysis is a
tool, which is effective for short-term investing.
Technical analysis is done by identifying the trend from past movements and then using
it as a tool to predict future price movements of the stock. It can be done by using any of
the following methods:
a) Moving Averages—This method is used to predict the trend and specify various
support and resistance levels in the short and long term period. Most commonly used
moving averages are 30 DMAs and 200 DMAs. Where DMA means Days Moving
Average.
b) Charts & Patterns—Some analysts’ uses charts and patterns to decide on the trend
and then judge the future movement. The tool used by such analyst is converting the chart
in one of the many form of many shapes commonly formed by stocks. Some of such
patterns are:
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Reversal Patterns: -
Continuation Patterns: -
1. Bump and Run
1. Cup with Handle
2. Double Top
2. Flag Pennant
3. Double Top
3. Symmetric Triangle
4. Double Bottom
4. Ascending Triangle
5. Head and Shoulders Top
5. Descending Triangle
6. Head and Shoulders Bottom
6. Price Channel
7. Falling Wedge
7. Rectangle
8. Rising Wedge
8. Measured {Bear} Move
9. Rounding Bottom
10. Triple Top
11. Triple Bottom
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b) Downward: - In this case as against Uptrend the stock creates lower Highs and
Lows. Furthermore in case of Downtrend the fall is much more steeper than the
rise in case of Uptrend.
c) Range-bound: - In case of such a trend the price moves in a small range for the
long period. There is no apparent direction as far as trend is concerned in this
case.
Role of Volume: Volume plays a key role in deciding about the kind of future movement
in stock. Whenever there is a sudden rise in the volume of the stock and if it is not
followed by a price fall, it is a sign of consolidation and that the price may rise in near
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future. Generally if any stock breaks any trend it is accompanied by huge rise in volume.
In case of range bound trend the volume tends to die down to a great extent. Smart
investors uses technical analysis to judge the rise in volume and take early positions in
the stock during breakthroughs
Principles
Stock chart showing levels of support (4, 5, 6, 7, and 8) and resistance (1, 2, and 3);
levels of resistance tend to become levels of support and vice versa.
Technicians say that a market's price reflects all relevant information, so their analysis
looks more at "internals" than at "externals" such as news events. Price action also tends
to repeat itself because investors collectively tend toward patterned behavior – hence
technicians' focus on identifiable trends and conditions.
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Based on the premise that all relevant information is already reflected by prices, pure
technical analysts believe it is redundant to do fundamental analysis – they say news and
news events do not significantly influence price, and cite supporting research such as the
study by Cutler, Poterba, and summers titled "What Moves Stock Prices?"
On most of the sizable return days [large market moves]...the information that the press
cites as the cause of the market move is not particularly important. Press reports on
adjacent days also fail to reveal any convincing accounts of why future profits or discount
rates might have changed. Our inability to identify the fundamental shocks that accounted
for these significant market moves is difficult to reconcile with the view that such shocks
account for most of the variation in stock returns.
Technical analysts believe that prices trend. Technicians say that markets trend up, down,
or sideways (flat). This basic definition of price trends is the one put forward by Dow
Theory.
An example of a security that had an apparent trend is AOL from November 2001
through August 2002. A technical analyst or trend follower recognizing this trend would
look for opportunities to sell this security. AOL consistently moves downward in price.
Each time the stock rose, sellers would enter the market and sell the stock; hence the
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"zig-zag" movement in the price. The series of "lower highs" and "lower lows" is a tell
tale sign of a stock in a down trend. In other words, each time the stock edged lower, it
fell below its previous relative low price. Each time the stock moved higher, it could not
reach the level of its previous relative high price.
Note that the sequence of lower lows and lower highs did not begin until August. Then
AOL makes a low price that doesn't pierce the relative low set earlier in the month. Later
in the same month, the stock makes a relative high equal to the most recent relative high.
In this a technician sees strong indications that the down trend is at least pausing and
possibly ending, and would likely stop actively selling the stock at that point.
Technical analysts believe that investors collectively repeat the behavior of the investors
that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to
$50 again, I will buy it," "This company's technology will revolutionize its industry,
therefore this stock will skyrocket" – these are all examples of investor sentiment
repeating itself. To a technician, the emotions in the market may be irrational, but they
exist. Because investor behavior repeats itself so often, technicians believe that
recognizable (and predictable) price patterns will develop on a chart.
Technical analysis is not limited to charting, but it always considers price trends. For
example, many technicians monitor surveys of investor sentiment. These surveys gauge
the attitude of market participants, specifically whether they are bearish or bullish.
Technicians use these surveys to help determine whether a trend will continue or if a
reversal could develop; they are most likely to anticipate a change when the surveys
report extreme investor sentiment. Surveys that show overwhelming bullishness, for
example, are evidence that an uptrend may reverse – the premise being that if most
investors are bullish they have already bought the market (anticipating higher prices).
And because most investors are bullish and invested, one assumes that few buyers
remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This
suggests that prices will trend down, and is an example of contrarian trading.
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Use
Many traders say that trading in the direction of the trend is the most effective means to
be profitable in financial or commodities markets. John W. Henry, Larry Hite, Ed
Seykota, Richard Dennis, William Eckhardt, Victor Sperandeo, Michael Marcus and Paul
Tudor Jones (some of the so-called Market Wizards in the popular book of the same
name by Jack D. Schwager) have each amassed massive fortunes via the use of technical
analysis and its concepts. George Lane, a technical analyst, coined one of the most
popular phrases on Wall Street, "The trend is your friend!"
Investors for their short-term trading decisions use technical analysis. This short-term
may be further divided in day trading, short-term investment and for hedging purposes.
The role played by technical analysis in each case is as follows:
1) Day Traders: A day trader is one who takes and squares off his position both on
thesame day. Mostly a day trader counts on turnover rather than margin.
2) Short term investors: These people form the biggest clientele base of both the
brokers and the technical Analyst.
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3.Hedgers: These are generally big investors, who have lot of money at stake and
hencethey look to have some hedging of their risk. The strategy followed by this section
of investors is that they compare the stock in consideration with the index and on the
basis of the result of this comparison they take their position in the stock.
Concepts
• Dead cat bounce - generically refers to what turns out to be a significant but
temporary price rise during a sustained decline, typically for what are thought to
be technical reasons.
•
• Elliott wave principle and the golden ratio to calculate successive price
movements and retracements.
•
• BPV Rating - pattern for identifying reversals using both volume and price.
Overlays
• Breakout - when a price passes through and stays above an area of support or
resistance.
•
• Trend line - a sloping line of support or resistance.
•
Price-based indicators
These indicators are generally shown below or above the main price chart.
Price charts provide the fundamental building block in the analysis of market action.
The use of charts and technical indicators provide the average investor with the only
real edge available in trading the markets.
As you become familiar with viewing and using charts, readily identifiable patterns will
become apparent that can immediately give you a good notion of the profit potential for a
particular stock, mutual fund or commodity. See the discussion of the use of Trendlines
and Three Simple Rules.
The following basic types of price charts are the most commonly used. These charts
provide the "background" or "foundation" for most of the common indicators. In most
cases indicators are shown superimposed on the price chart itself or in a separate chart
below the price chart. Most of the analytical tools compare the action of an indicator
against that of the price.
Bar: each bar represents a day's trading showing the lowest to highest price, open &
close. This is the most common type of chart used. Time is factored into the price
movements. Volume charts often accompany bar charts.
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Line: the line represents the closing prices only for a given time. This tends to smooth
out daily fluctuations in price, sometimes giving a better picture of the overall trend.
Point and figure: shows price changes with X columns for rising prices and O columns
for declining prices. Unlike the other basic charts, time itself is not a factor. Point and
figure charts plot only the direction of a price move and the change in value. Proponents
believe this gives them a clearer view of the underlying actions of supply and demand.
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Candlesticks: use a wider bar to represent the difference between open and closing
prices - black for a decline and white for a rise. Patterns of black versus white (declining
vs rising markets) readily become apparent with candlestick charts.
Bar Chart: This is likely the most common type of chart used. Bar charts simply plot the
change in price over time (daily, weekly, monthly or minute-by-minute).
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Dow Theory
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Dow Theory at a Glance
Overview
Dow Theory is based on the philosophy that the market prices reflect every significant
factor that affects supply and demand - volume of trade, fluctuations in exchange rates,
commodity prices, bank rates, and so on. In other words, the daily closing price reflects
the psychology of all players involved in a particular marketplace - or the combined
judgment of all market participants.
The goal of the theory is to determine changes in the major trends or movements of the
market. Markets tend to move in the direction of a trend once it becomes established,
until it demonstrates a reversal. Dow theory is interested in the direction of a trend and
doesn't offer any forecasting ability for determining the ultimate duration of a trend.
Classification of a trend
Principles of confirmation or divergence
Use of volume to confirm trends
Use of percentage retracement
Recognition of major bull and bear markets
Signaling the large central section of important market moves
Dow theory has been successful in identifying 68% the major trends over
the years
The primary (major) trend or tide is a long term trend lasting from a year
to several years
The secondary trend (or mid-term trend) or wave lasts three weeks to three
months and represents corrections of one third to two thirds of the
previous movement - most often fifty percent of the movement.
The minor trends (short-term trends) or insignificant ripples last less than
three weeks and represent fluctuations in the secondary trend.
Public Participation phase: Prices increasing rapidly and bullish markets are reported.
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Distribution phase: Astute investors sell first, thereby leading the public.
Must be confirmed by the Dow Averages, calculated on closing prices only, not the daily
high or low (this provides the overall stock market trend).
Should have volume increase/decrease in the direction of the trend
Stays in effect until it gives definite reversal signals
The major criticism of the Dow Theory is its slowness: It misses about 25% of a move
before giving a signal, primarily because it is a trend following system designed to
identify existing trends.
Candlestick Patterns
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Candlestick charting was popularized in Japan and has received world wide recognition.
Each candlestick is composed of four values, the high, low, open and close. The
advantage to this form of charting is that it provides more visual information about the
trading day as well as many trading signals to help decision making.
The body of the candlestick (or jittai) is the open and the close of the trading day. The
high and the low of the day create the upper and lower shadows of the main candle body.
(Most charting programs will allow you to use other colors in the bar, typically green for
white candle and red for black candle)
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Moving Averages:-
Moving Averages (MAs) provide a set of very useful indicators for tracking trends and
trend reversals.
Overview
The Moving Average (MA) is one of the simplest, yet most versatile and widely used of
all technical indicators. The MA attempts to tone down the fluctuations of market prices
to a smoothed trend, so that distortions are reduced to a minimum. MAs help in tracking
trends and signaling reversals. You could think of the MA as a curved trend line, fitting
itself to the market.
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Interpretation
Signals to buy or sell are generated when the price crosses the MA or when one MA
crosses another, in the case of multiple MAs. As with trend lines, the MA often provides
an area of support and resistance. The more times an MA has been touched (i.e., acts as
support or resistance) the greater the significance when it is crossed.
Since the MA is a lagging indicator, a crossover will usually signal a trend reversal well
after a new trend has begun and is used largely for confirmation. Generally speaking, the
longer the time span covered by an MA, the greater the significance of a crossover signal.
For example, the crossover of a 100 or 200-day MA is significantly more important then
the crossover of a 20-day MA.
Moving averages differ according to the weight assigned to the most recent data. Simple
moving averages apply equal weight to all prices. Exponential and weighted averages
apply more weight to recent prices. Variable moving averages change the weighting
based on the volatility of prices.
When prices fluctuate up and down in a broad sideways pattern for an extended period
(trading-range market), longer term MAs are slow to react to reversals in trend, and when
prices move sideways in a narrow range shorter term MAs often produce false signals.
Flat and conflicting MAs generally indicate a trading-range market and one to avoid,
unless there is pronounced rounding that suggests a possible new trend.
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Simple Use of multiple MAs can provide good Crossover of short term through
signals long term
(This is the
most Useful periods Convergence/ Divergence
commonly
used MA) Short term 10-30 day Crossover of MA by price
Mid term 30-100-day
Long term 100-200+day
Linearly With this MA, data is weighted in Warning of trend reversal given by
Weighted favour of most recent observations. change in direction of the average
Has the ability to turn or reverse more rather than crossover.
quickly than simple MA.
The Relative Strength Index (RSI) can provide an early warning of an opportunity to buy
or sell.
Overview
The Relative Strength Index (RSI) is a popular oscillator developed by Welles Wilder, Jr
(see his book, New Concepts in Technical Trading Systems). RSI measures the relative
changes between higher and lower closing prices, and provides an indication of
overbought and oversold conditions.
The term "Relative Strength" is slightly misleading and often causes some confusion.
Relative strength generally means a comparison between two different markets or
indices. RSI, on the other hand, looks at the internal strength of a single market.
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Interpretation
RSI is plotted on a vertical scale of 0 to 100. The 70% and 30% levels are used as
warning signals. An RSI above 70% is considered overbought and below 30% is
considered oversold. The 80% and 20% levels are preferred by some traders. The
significance depends upon the time frame being considered. An overbought reading in a
9-day RSI is not nearly as significant as an RSI for a 12-month period.
RSI can be plotted for any time span. Wilder originally recommended using a 14-day
RSI. Since then, the 9, 10 and 25-day RSIs have also become popular. The shorter the
time period, the more sensitive the oscillator becomes. If the user is trading short-term
moves, the time period can be shortened. Lengthening the time period makes the
oscillator smoother and narrower in amplitude.
In using RSI, a crossover above the 70% level is a warning signal to prepare to sell and,
conversely, when the RSI falls below 30% you have a notice to prepare to buy. The
actual buy and sell signals are given when the RSI reverses (see below). RSI crossings
through the 50% level are also used as buy and sell signals by some traders.
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Fibonacci arcs & retracements help anticipate support and resistance levels along with
price targets.
Overview
After making long sustained moves in one direction, many markets retrace a part of the
move before continuing on further. The Fibonacci indicator, popularized by Ralph
Nelson Elliot, is used to try and forecast potential support levels and price targets, based
on the height of the overall move and any wave patterns.
For example, if a stock increased from $5 to $10 and then slipped back 50%, this
retracement would take it to $7.50 before it continued upwards again.
This indicator uses mathematical ratios discovered by Leonardo Fibonacci's in the 12th
century. The Fibonacci summation series is 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144... and
so on to infinity. Interestingly, these numbers have the following constant relationships:
• The sum of any two consecutive numbers equals the next higher number.
• The ratio between any number and the next higher number approaches 0.618 after
the first four calculations.
• The ratio between any number and the next lower number is approximately 1.618
(the inverse of 0.618).
The number 1.618 is commonly referred to as the Golden Mean or the Golden Section.
The real value of this number series is that it is "the most important mathematical
presentation of natural phenomena ever discovered" (R. Fischer). It keeps popping up in
everything from the proportions of the Egyptian pyramids... the number of florets in
flower heads... the double helix of the DNA molecule... to the logarithmic spiral of the
nautilus shell.
(The well-known Elliot Wave Principle is also based on the application of Fibonacci
numbers to the waves evident in any price chart.)
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Interpretation
The most commonly used numbers in this analysis are 61.8% (usually rounded off to
62%), 38% and 50%. This means that, in a strong trend, the minimum retracement is
usually close to the 38% level and may go as far as the 62% level.
Constance Brown, a well known technical analyst, has written, "If the market has shown
respect in the past to a Fibonacci grid drawn on the chart, the chances are much higher
that it will also respect those levels in the future market action."
Fibonacci Retracements
Fibonacci arcs can be added to the same chart, or they can be charted alone. The arcs are
drawn centered on the last peak or trough, crossing the original trendline at the points
where the retracement lines intersect. The price will tend to "react" to both the arcs and
the retracement levels, as they provide support and resistance.
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Charts
This Stock is making Double bottom at 38.00 on Chart. So 38.00 can be taken as short
term Support.
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This Stock is making Double Top at 387.50 on Chart. So 387.50 can be taken as short
term Resistance.
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Conclusion
If we use only technical analysis in itself and do not consider other aspects it is very
unlikely that we will have much success in the long run, particularly in case of short-term
investments. But if we use technical analysis along with fundamental analysis or
discount the industry and company related news while considering the valuation, our
chances of minimizing the risk brightens.
One thing that we must realize is that technical analysis provides us only with the trend
and judge future on that basis, it can be far from actual in few cases. The best use of
technical analysis is to realize the trend and levels at which it will break the trend so that
one is prepared to take positions when such trend breaks. It is because of this
Disadvantage that technical analysis more useful only for short-term investing…
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Bibliography:-
1) Brock, William, Josef Lakonishok and Blake Lebaron (1992). "Simple Technical
Trading Rules and the Stochastic Properties of Stock Returns," The Journal of Finance,
47(5), pp. 1731–1764.
3) http://www.datek.smartmoney.com
4) http://www.tradersedgeindia.com
5) http://www.vfmdirect.com
6) http://www.stockcharts.com
7) http://www.nseindia.com