Technical Analysis, Nishant Dhruv

[Type the document subtitle] | master

NISHANT

DHRUV TECHNICAL ANALYSIS – MODULE II

2 | P a g e

Te

ch

ni

ca

l

An

al

ys

is

,

Ni

sh

an

t

Dh

ru

v

What is Technical Analysis?

Technical Analysis can be defined as an art and science of forecasting future prices based on

an examination of the past price movements.

There are essentially two methods of analyzing investment opportunities in the security

market viz fundamental analysis and technical analysis. You can use fundamental

information like financial and non-financial aspects of the company or technical information

which ignores fundamentals and focuses on actual price movements.

Dow Theory

Developed by Charles Dow, refined by William Hamilton and articulated by Robert Rhea,

the Dow Theory addresses not only technical analysis and price action, but also market

philosophy.

Charles Dow developed the Dow Theory from his analysis of market price action in the late

19th century. Until his death in 1902, Dow was part owner as well as editor of “The Wall

Street Journal”.

Dow and Hamilton identified three types of price movements for the Dow Jones Industrial

and Rail averages: primary movements, secondary movements and daily fluctuations.

Primary movements

Primary movements represent the broad underlying trend of the market and can last from a

few months to many years. These movements are typically referred to as bull and bear

markets. Hamilton believed that the length and the duration of the trend were largely

indeterminable. Dow Theory enables investors to identify the primary trend and invest

accordingly. Trying to predict the length and the duration of the trend is an exercise in

futility.

Secondary movements

Secondary movements run counter to the primary trend and are reactionary in nature. In a

bull market a secondary move is considered a correction. In a bear market, secondary moves

are sometimes called reaction rallies.

Based on historical observation, Hamilton estimated that secondary movements retrace 1/3 to

2/3 of the primary move, with 50% being the typical amount. For example, the secondary

move in early 2004 retraced exactly 66% of the primary move (May 2003 – January 2004)

Nifty surged from 920 to 2014 i.e. a move of 1094 points; 2014 - 1292 = 722, 722/10.94

= 66%).

The secondary move in mid 2006 retraced exactly 50% of the primary move (June 2004 –

May 2006) Nifty surged from 1292 to 3774 i.e. a move of 2482 points; 3774 - 2595 = 1179,

1179/24.82 = 47.16%). Hamilton also noted that secondary moves tend to be faster and

sharper than the preceding primary move.

3 | P a g e

Te

ch

ni

ca

l

An

al

ys

is

,

Ni

sh

an

t

Dh

ru

v

Daily fluctuations

Daily fluctuations, while important when viewed as a group, can be dangerous and be

unreliable individually. Due to the randomness of the movements from day to day, the

forecasting value of daily fluctuations is limited at best. At worst, too much emphasis on

daily fluctuation will lead to forecasting errors and possibly losses. It is vitally important to

keep the whole picture in mind when analyzing daily price movements. Think of the pieces of

a puzzle. Individually, a few pieces are meaningless, yet at the same time they are essential to

complete the picture. Daily price movements are important, but only when grouped with

other days to form a pattern for analysis. There is little structure in one, two or even three

days' worth of price action. However, when a series of days is combined, a structure will start

to emerge and analysis becomes better grounded.

CHARTS:

Charts are the working tools of technical analysts. They use charts to plot the price

movements of a stock over specific time frames. It's a graphical method of showing where

stock prices have been in the past.

TYPES OF PRICE CHARTS

1. Line charts

"Line charts" are formed by connecting the closing prices of a specific stock or market over a

given period of time. Line chart is particularly useful for providing a clear visual illustration

of the trend of a stock's price or a market's movement. It is an extremely valuable analytical

tool which has been used by traders for past many years.

4 | P a g e

Te

ch

ni

ca

l

An

al

ys

is

,

Ni

sh

an

t

Dh

ru

v

2. Bar chart

Bar shows the high price for the period at the top and the lowest price at the bottom of the

bar. Small lines on either side of the vertical bar serve to mark the opening and closing prices.

The opening price is marked by a small tick to the left of the bar; the closing price is shown

by a similar tick to the right of the bar. Many investors work with bar charts created over a

matter of minutes during a day's trading.

3. Candlesticks

Candlestick charts provide visual insight to current market psychology. A candlestick

displays the open, high, low, and closing prices in a format similar to a modern-day bar-chart,

but in a manner that accentuates the relationship between the opening and closing prices.

Candlesticks don’t involve any calculations. Each candlestick represents one period (e.g.,

day) of data.

5 | P a g e

Te

ch

ni

ca

l

An

al

ys

is

,

Ni

sh

an

t

Dh

ru

v

A candlestick chart can be created using the data of high, low, open and closing prices for

each time period that you want to display. The hollow or filled portion of the candlestick is

called "the body" (also referred to as "the real body"). The long thin lines above and below

the body represent the high/low range and are called "shadows" (also referred to as "wicks"

and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of

the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is

drawn with the bottom of the body represents the opening price and the top of the body

representing the closing price. If the stock closes lower than its opening price, a filled

candlestick is drawn with the top of the body representing the opening price and the bottom

of the body representing the closing price.

6 | P a g e

Te

ch

ni

ca

l

An

al

ys

is

,

Ni

sh

an

t

Dh

ru

v

OTHER CHARTING TECHNIQUES: (Already written in class note)

1. Support

2. Resistance

3. Head & Shoulders (Top & Inversion Formation)

4. Double Top

5. Double Bottom

6. Triangle

7. Price Volumes & Others…