Naresh Chaudhary Sip.

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ICFAI Business School-Summer Internship Project Page 2

A REPORTON

TECHNICAL ANALYSIS ON EQUITY MARKETWITH RELATION TO SPECIFIC STUDY ON TRENDS,

MOVING AVERAGE, OSCILLATOR(Final Report)

BY:

NARESH CHAUDHARY (08BS0001854)

A Report Submitted In the Partial Fulfillment of the

Requirement of MBA Degree

Submitted To:

Prof. MAYANK PATEL (Faculty guide)

Mr. VALLABH MARFATIA (Company guide)

Date of Submission: May 22, 2009


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Table of Contents

ACKNOWLEDGEMENT................................................................................................................................ 3

ABSTRACT.................................................................................................................................................. 7

OBJECTIVES OF THE PROJECT: ............................................................................................................... 9

METHODOLOGY:........................................................................................................................................ 10

LIMITATIONS OF THE STUDY: ................................................................................................................. 11

ABOUT VIMAL PRIORTIES ...................................................................................................................... 12

Introduction about the project.................................................................................................. 14

First PHASE OF PROJECT..................................................................................................................... 15

Technical analysis of the equity market........................................................................ 15

INTRODUCTION .......................................................................................................................................... 16

Basis of Technical Analysis.................................................................................................................... 17

General Steps to Technical Evaluation ................................................................................................... 18

Criteria of analyzing: .............................................................................................................................. 19

CHART ANALYSIS: ....................................................................................................................................... 20

1. Line chart:- ...................................................................................................................................... 20

2. Bar chart: ......................................................................................................................................... 21

3. Candlestick chart: ................................................................................................................................ 22

4. Point and figure chart ......................................................................................................................... 23

Time Frame to be used............................................................................................................................ 23

APPLICATION OF TREND LINE ............................................................................................................... 25TREND LINE............................................................................................................................................. 25

1. Uptrend Line ................................................................................................................................... 25

2. Downtrend Line .............................................................................................................................. 26

3. Sideways/Horizontal Trends: .......................................................................................................... 27

Trend Lengths ......................................................................................................................................... 27Channels.................................................................................................................................................. 28

Support and Resistance ........................................................................................................................... 30

Support level: .......................................................................................................................................... 30

Point of establishment:............................................................................................................................ 31

Methods to Establish Support and Resistance .................................................................................... 32


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Conclusion.............................................................................................................................................. 34

Technical Indicators:........................................................................................................................ 36APPLICATION OF INDICATORS ................................................................................................................ 37

Moving Averages ............................................................................................................................ 38

1. Simple Moving Average (SMA)..................................................................................................... 38

2. Exponential Moving Average (EMA) ......................................................................................... 39

3. EMA VS SMA ................................................................................................................................ 40

Major Uses of Moving Averages ........................................................................................................ 42

CONCLUSION .......................................................................................................................................... 44

Moving Average Convergence/Divergence (MACD).......................................................... 45

MACD BULLISH SIGNAL ............................................................................................................... 46

MACD Bearish Signals....................................................................................................................... 48

MACD-Histogram .............................................................................................................................. 50

RELATIVE STRENGTH INDEX ............................................................................................................. 52

USE OF RELATIVE STRENGTH INDEX ....................................................................................... 52

RATE OF CHANGE................................................................................................................................ 54

TRIX........................................................................................................................................................ 56

Example .................................................................................................................................................. 57

STOCHASTIC OSCILLATOR.................................................................................................................. 57

APPLICATION OF STOCHATICS: ........................................................................................................... 58

On-Balance Volume - OBV.............................................................................................................. 60

Money flow index ............................................................................................................................ 61

1. Divergences..................................................................................................................................... 62

2. Overbought/Oversold...................................................................................................................... 62

BOLLINGER BANDS .............................................................................................................................. 63

Application.............................................................................................................................................. 64

Illustrations and experimentation........................................................................................... 66

1. RELIANCE POWER.......................................................................................................................... 67

2. ABAN OFFSHORE ............................................................................................................................ 69

3. HDFC BANK...................................................................................................................................... 70


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CONCLUSION.............................................................................................................................................. 72

Second PHASE OF PROJECT................................................................................................................. 73

Marketing oriented....................................................................................................................... 73

Approach to promote company product............................................................................... 73

PLAN FOR THE SECOND PHASE (MARKETING ORIENTED) ............................................................... 74

Problem faced during marketing project.............................................................................. 76

Conclusion.............................................................................................................................................. 78

REFERENCES ............................................................................................................................................ 79


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ABSTRACT

Technical analysis is the study of predicting prices of securities for future .The

main aim of technical analysis is to generate returns by letting person decide when

to enter the market and when to exit in the security. Technical analysis uses various

charts and tools for analysis of particular scrip or sector. This project throws the

light on various basic aspects of technical analysis and the implication of tools to

be utilized in generating the advisory tip or future price prediction.

As today in stock market decisions are very important and most of the people make

investment on the advises of broker, And these advises cannot be generated only

by scanning the company, economy or industrial aspects, rather it require to bring

both fundamental and technical analysis together to bring out the best quality of

advisory tips .The point, of course, is that the typical investor follows and does not

lead trends, rather he became a crowd-follower than a self director.

During the summer internship training, I have chosen the project on the technical

analysis of the equity market, as there are many numbers of technical indicators

and tools to make the future prediction but my focus of study remains with the

moving averages, trends and oscillators.

For this purpose the various equity scrips has been taken to understand there price

movement and also the application of the various indicators is utilized to put it in

to the practical use and generate the real feel of market prediction with the help of

technical analysis.


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Along with the project, some tasks related to technical analysis provided by the

company mentor has been done for the enhancement of knowledge in this

particular field. The working on the calculations for the technical tools on excel

sheet for generating the better learning of the concepts. We were also involved in

the sales and marketing of the companys advisory products in Ahmadabad, which

brought in a good learning by meeting the professional of this industry like sub-

brokers and research analysts.


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OBJECTIVES OF THE PROJECT:

.Understanding the basics of the technical analysis.

Understanding various technical indicators and their

interpretations.

To learn the application of the different softwares, helping in

technical analysis.

To learn the identification of current trends in the equity or

security and also measure the volatility and momentum in trading

activity.

Detailed study on the moving averages and oscillators, and also

utilizing this for the prediction of the future movements.

Also, the knowledge of the companys product and how to

generate the tips for the advisory house.To put the skill developed in practice into the live stock trading.

To understand the prediction generation in the worst market

scenario, economic depression


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METHODOLOGY:Study of books on the technical analysis and learning the

theoretical implication of all the aspects.Detailed study on the moving averages and also the oscillators.

Interpretation of the charts from past data and also tracking the

days end chart on various useful websites.

Visualizing the theoretical concepts of technical analysis on the

daily trading charts of the equity scrips and generating the

inferences.

To have the learning of the technical analysis in live market with

the help of softwares like META STOCK, FXTDD, ICHARTS.

Evaluating the different approaches of the moving average and

oscillators in different equity scrips and also to find out the model

framework for the common investor.Generating the brief knowledge on the model used by the company

for the generation of the advisory tips and implementing it for

future predictions.

Working on spreadsheet for the calculation of major indicators to

Inculcate the real sense of concept behind the indicator.


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LIMITATIONS OF THE STUDY: As the technical analysis is a vast subject and compressing all in one project

is not possible.

The time period is three months which is not adequate enough for putting all

the theoretical concepts into the practical learning theoretical and practical

learning of the subject, as immense practice is required

Learning of technical aspects on the software for the real market is not

provided with adequate time, as it has to be done only after the market

hours.

The market conditions also had an impact on the selling of the companys

products, which also lead to some problems in the field.

The methodology used by company, during this economic scenario is bit

regulated which doesnt allow us to go through the real scenario.

The technical knowledge was provided in the company only on weekend.


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ABOUT VIMAL PRIORTIES

VIMAL PRIORITY is an Ahmadabad based leading research andadvisory based company with a governing position in both Institutional

and Retail industries.

Vimal Priority provides multitude of services to suit all kind of players

in Indian stock market under brand name of Vimal Priority, Vimal

Stocks and Vimal Commodities.

The company offers the wide range of the advisory products alike

Intraday, F&O, Jackpot calls, Delivery, Nifty which aids to Investors,Traders and Portfolio Advisories personnel.

The services are provided with immediate impact and all these services

are provided through SMS, Messenger and Relationship management.

These are the services are provided at the vimal priorities.

.


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BULLS EYE: It is an advisory service and the main objective of thisservice is to provide the customer with handsome profit in the intraday,F$O and delivery.

It provides Privileged daily minimum 24 calls in Intraday, F & O andDelivery Service and generates more than 85% return on investment.

COMBO CALLS: This service provides with the advisory tips for all

the trading ways like intraday, delivery, future, nifty, etc; it is for the

Short Term Income Generation and provides the Daily 3 or 4 call in

Intraday & 2 or 3 calls in F & O

INTRADAY: It is for the short term capital growth , and requires the

minimum investment ofRs.3 lacs and provides3 or 4 call in a day and

generate the returns of more than 45%.

INVESTMENT CALLS: This provides the service for the advisory of

the delivery trading. It is for the Short Term & Long Term CapitalGrowth and provides with the Minimum10 call in a 3 Month on thedelivery base and generates the more than 49% returns.

NIFTY CALLS: This service provides the advisory tips related to the

nifty and it is also for the Short Term Capital Growth and provides the 1

or 2 calls on the daily basis and generates the 35% returns

PREMARKET PRIORITY: In this very unique and attractive product,a customer gets call before market opening and he will trade only onthose calls which he has got in the morning. This product is available atRs.1000.


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Introduction about the project

THE PROJECT IS BASICALLY BASED ON THE STUDY OFTECHNICAL ANLYSIS AND ITS IMPLICATION ON THE EQUITY

MARKET

THE PROJECT IS DONE IN TWO PHASE AND THESE ARE DEFINED

AS UNDER:

1. UNDERSTANDING AND IMPLYING THE TECHNICAL ANALYSIS

ASPECTS FOR GENERATING THE ANALYSIS ON THE INDIAN

EQUITY MARKET.

A)Learning the theoretical aspects and making their implication on the

charts to generate the future scenario for the security

B)Applications of technical tools and there better utility.

C)Working upon the various Softwares to get exposed to the live stock

market and working in the real market conditions

D) Working upon the Preparation of a spreadsheet model to calculate all the

major technical indicators value.

2. SECOND PHASE OF THE PROJECT : MARKETING ORIENTED

A)Getting well aware with the advisory products available with the

company and competitors .

B) Aiding the company by developing the sales teams and providing the

knowledge about the companys product to the potential customers

C)Interactions with the professional peoples of the industry and

Generating the sales from the brokers, sub-brokers and high net worth

individuals.


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First PHASE OF PROJECT

Technical analysis of

the equity market


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INTRODUCTION

TECHNICAL ANALYSIS

The methods used to analyze securities and make investment decisions fall intotwo very broad categories: fundamental analysis and technical analysis.Fundamental analysis involves analyzing the characteristics of a company in orderto estimate its value. Technical analysis takes a completely different approach; itdoesn't care one bit about the "value" of a company or a commodity.

Technical analysis has its own approach and really juststudies supply and demand in a market in an attempt to determine what direction,

or trend, will continue in the future. In other words, technical analysis attempts tounderstand the emotions in the market by studying the market itself, as opposed toits components. If you understand the benefits and limitations of technical analysis,it can give you a new set of tools or skills that will enable you to be a better trader

Technical Analysis is the forecasting of future financial price movements based onan examination of past price movements. Like weather forecasting, technicalanalysis does not result in absolute predictions about the future. Instead, technicalanalysis can help investors anticipate what is "likely" to happen to prices over time.Technical analysis uses a wide variety of charts that show price over time.

Technical analysis is applicable to stocks, indices, commodities, futures or anytradable instrument where the price is influenced by the forces of supply anddemand. Price refers to any combination of the open, high, low, or closes for agiven security over a specific time frame. The time frame can be based on intraday(1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily,weekly or monthly price data and last a few hours or many years. In addition, sometechnical analysts include volume or open interest figures with their study of priceaction.

Technical analysis is a method of evaluating securities by analyzing the statisticsgenerated by market activity, such as past prices and volume. Technical analystsdo not attempt to measure a security's intrinsic value, but instead use charts andother tools to identify patterns that can suggest future activity.
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Just as there are many investment styles on the fundamental side, there are alsomany different types of technical traders. Some rely on chart patterns, others usetechnical indicators and oscillators, and most use some combination of the two. Inany case, technical analysts' exclusive use of historical price and volume data iswhat separates them from their fundamental counterparts. Unlike fundamentalanalysts, technical analysts don't care whether a stock is undervalued - the onlything that matters is a security's past trading data and what information this datacan provide about where the security might move in the future.

Basis of Technical AnalysisThe field of technical analysis is based on three assumptions:

1. The market discounts everything.

2. Price moves in trends.

3. History tends to repeat itself.

1. The Market Discounts everything:-

A major drawback of technical analysis is that it only considers price

movement, ignoring the fundamental factors of the company. However,

technical analysis assumes that, at any given time, a stock's price reflects

everything that has or could affect the company - including fundamental

factors. Technical analysts believe that the company's fundamentals, along

with broader economic factors and market psychology, are all priced into the

stock, removing the need to actually consider these factors separately. This

only leaves the analysis of price movement, which technical theory views as

a product of the supply and demand for a particular stock in the market.

2. Price Moves in Trends:

In technical analysis, price movements are believed to follow trends. This

means that after a trend has been established, the future price movement is
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more likely to be in the same direction as the trend than to be against it.

Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself:

Another important idea in technical analysis is that history tends to repeat

itself, mainly in terms of price movement. The repetitive nature of price

movements is attributed to market psychology; in other words, market

participants tend to provide a consistent reaction to similar market stimuli

over time. Technical analysis uses chart patterns to analyze market

movements and understand trends. Although many of these charts have been

used for more than 100 years, they are still believed to be relevant becausethey illustrate patterns in price movements that often repeat themselves.

General Steps to Technical Evaluation

Many technicians employ a top-down approach that begins with broad-basedmacro analysis. The larger parts are then broken down to base the final step on amore focused/micro perspective. Such an analysis might involve three steps:

Broad market analysis through the major indices such as the S&P 500,Dow industrials, BSE SENSEX, NSE.

Sector analysis to identify the strongest and weakest groups within thebroader market.

Individual stock analysis to identify the strongest and weakest stockswithin select groups.

The beauty of technical analysis lies in its versatility. Because the principles oftechnical analysis are universally applicable, each of the analysis steps above canbe performed using the same theoretical background. You don't need an economicsdegree to analyze a market index chart. It does not matter if the time frame is 2days or 2 years. It does not matter if it is a stock, market index or commodity. Thetechnical principles of support, resistance, trend, trading range and other aspects


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can be applied to any chart. While this may sound easy, technical analysis is by nomeans easy. Success requires serious study, dedication and an open mind.Technical analysis really just studies supply and demand in a market in an attemptto determine what direction, or trend, will continue in the future. In other words,technical analysis attempts to understand the emotions in the market by studyingthe market itself, as opposed to its components.

Criteria of analyzing:

All the building blocks of technical analysis are in the price charts. Market patterns

and behaviors, and various types of market data (technical indicators) are used to

determine the strength and sustainability of a particular trend, the maturity or stage

of the current trend, reward to risk ratio of new position, and potential entry levels

for new position.

It is accomplished by:-

Identifying the short, medium and long-term trends for market direction.

This can be accomplished by generating trend lines and moving averages.

Identifying the levels of support and resistance to determine where price is

likely to change direction.

Identifying the price (or chart) patterns that indicate reversals or the

continuation of a trend.

Identifying the momentum of the stock, which can be usually measured with

an oscillator such as MACD, and also looking into the relative strength of

the share?

Using technical indicators to reveal useful market forces behind the price to

predict the future movements and determine good points of entry and exit.


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CHART ANALYSIS:

A price chart is a sequence of prices plotted over a specific time frame technical

analysis is entirely based on the chart .Therefore; sometimes technical analysts are

called chartists.

A graphical historical record makes it easy to spot the effect of key events on a

securitys price, itsperformance over a period of time and whether its trading near

its highs, near its lows, or in between.

There are basically four types of charts which are as follows:

1. Line charts

2. Bar charts3. Candle stick charts

4. Point and figure charts.

But only first three of the charts are used very frequently for the analysis part.

These are explained under with reference of chart example.

1. Line chart:-

The most basic of the four charts is the line chart because it represents onlythe closing prices over a set period of time. The line is formed by

connecting the closing prices over the time frame. Line charts do not

provide visual information of the trading range for the individual points

such as the high, low and opening prices. However, the closing price is

often considered to be the most important price in stock data compared to

the high and low for the day and this is why it is the only value used in line

charts.

The chart below given of HDFC shows the closing price and its trens with

the help of line chart.
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2.Bar chart:

Perhaps the most popular charting method is the bar chart. The high, lowand close are required to form the price plot for each period of a bar chart.The high and low are represented by the top and bottom of the vertical barand the close is the short horizontal line crossing the vertical bar. On a dailychart, each bar represents the high, low and close for a particular day.Weekly charts would have a bar for each week based on Friday's close andthe high and low for that week.


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3. Candlestick chart:

The candlestickchart is similar to a bar chart, but it differs in the way that itis visually constructed. Similar to the bar chart, the candlestick also has athin vertical line showing the period's trading range. The difference comesin the formation of a wide bar on the vertical line, which illustrates thedifference between the open and close. And, like bar charts, candlesticksalso rely heavily on the use of colors to explain what has happened duringthe trading period. A major problem with the candlestick colorconfiguration, however, is that different sites use different standards;therefore, it is important to understand the candlestick configuration used atthe chart site you are working with. There are two color constructs for daysup and one for days that the price falls. When the price of the stock is upand closes above the opening trade, the candlestick will usually be white or

clear. If the stock has traded down for the period, then the candlestick willusually be red or black, depending on the site. If the stock's price has closedabove the previous days close but below the day's open, the candlestickwill be black or filled with the color that is used to indicate an up day.

The white candlestick shows that the trading day remains the bullish one ,asthe closing price is more than the open price, rather the black candlestick
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describes the trading day to be the bearish one as the closing price is muchless than the open price .

4. Point and figure chart

Point & figure Charts are based solely on price movement, and do not taketime into consideration. There is an x-axis but it does not extend evenlyacross the chart. Only price movements that exceed specified levels arerecorded. This focus on price movement makes it easier to identify supportand resistance levels, bullish breakouts and bearish breakdowns.

Time Frame to be used

The time frame used for forming a chart depends on the compression of the data:

intraday, daily, weekly, monthly, quarterly or annual data. The less compressed the

data is, the more detail is displayed. The choice of data compression and time

frame depends on the data available and your trading or investing style.

Daily data is made up of intraday data that has been compressed to show each day

as a single data point, or period. Weekly data is made up of daily data that has been

compressed to show each week as a single data point. The difference in detail can

be seen with the daily and weekly chart comparison above. The more the data is


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compressed, the longer the time frame possible for displaying the data. If the chart

can display 100 data points, a weekly chart will hold 100 weeks (almost 2 years).

A daily chart that displays 100 days would represent about 5 months. There are

about 20 trading days in a month and about 252 trading days in a year.

Charts made up of daily and intraday data are generally used to forecast

short-term price movements. The shorter the time frame and the less

compressed the data is, the more detail that is available. While long on

detail, short-term charts can be volatile and contain a lot of noise. Large

sudden price movements, wide high-low ranges and price gaps can affect

volatility, which can distort the overall picture.

Weekly and monthly charts are used to spot long-term trends and forecast

long-term price movements. Because long-term charts (typically 1-4 years)

cover a longer time frame with compressed data, price movements do not

appear as extreme and there is often less noise.

Others might use a combination of long-term and short-term charts. Long-

term charts are good for analyzing the large picture to get a broad

perspective of the historical price action. Once the general picture is

analyzed, a daily chart can be used to zoom in on the last few months.

The choice of which charting method to use will depend on personal preferencesand trading or investing styles. Once you have chosen a particular charting

methodology, it is probably best to stick with it and learn how best to read the

signals. Switching back and forth may cause confusion and undermine the focus of

your analysis. Faulty analysis is rarely caused by the chart.


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APPLICATION OF TREND LINETREND LINE

Technical analysis is built on the assumption that prices trend. Trend Lines are animportant tool in technical analysis for both trend identification and confirmation.A trend line is a straight line that connects two or more price points and thenextends into the future to act as a line of support or resistance. Many of theprinciples applicable to support and resistance levels can be applied to trend linesas well.

In any given chart, you will probably notice that prices do not tend to move in astraight line in any direction, but rather in a series of highs and lows. In technicalanalysis, it is the movement of the highs and lows that constitutes a trend.

It is the basis of the trend lines which help up to the maximum for generating thesupport and resistance level, besides this it acts as technical indicator and also candescribe the market movement.

The trends in technical constitute three types:

1. Up trend2. Down trend3. Sideways trend

1.Uptrend Line

An uptrend line has a positive slope and is formed by connecting two or more low

points. The second low must be higher than the first for the line to have a positiveslope. Uptrend lines act as support and indicate that net-demand (demand lesssupply) is increasing even as the price rises. A rising price combined withincreasing demand is very bullish, and shows a strong determination on the part ofthe buyers.


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2. Downtrend Line

A downtrend line has a negative slope and is formed by connecting two or morehigh points. The second high must be lower than the first for the line to have anegative slope. Downtrend lines act as resistance, and indicate that net-supply(supply less demand) is increasing even as the price declines. A declining pricecombined with increasing supply is very bearish, and shows the strong resolve of

the sellers.

UPTREND

DOWNTREND


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3. Sideways/Horizontal Trends:

As the names imply, when each successive peakand trough is higher, it's referred

to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend.When there is little movement up or down in the peaks and troughs, it's a sidewaysor horizontal trend. If you want to get really technical, you might even say that asideways trend is actually not a trend on its own, but a lack of a well-defined trendin either direction.

Trend Lengths

A trend of any direction can be classified as a long-term trend, intermediate trendor a short-term trend.

In terms of the stock market, a major trend is generally categorized as one lastinglonger than a year. A long-term trend is composed of several intermediate trends,which often move against the direction of the major trend.

An intermediate trend is considered to last between one and three months and anear-term trend is anything less than a month. If the major trend is upward and

SIDEWAYS TREND
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there is a downward correction in price movement followed by a continuation ofthe uptrend, the correction is considered to be an intermediate trend.

The short-term trends are components of both major and intermediate trends. It isthe trend for the few weeks.

When analyzing trends, it is important that the chart is constructed to best reflect

the type of trend being analyzed. To help identify long-term trends, weekly charts

or daily charts spanning a five-year period are used by chartists to get a better idea

of the long-term trend. Daily data charts are best used when analyzing both

intermediate and short-term trends. It is also important to remember that the longer

the trend, the more important it is; for example, a one-month trend is not as

significant as a five-year trend.

Channels

A channel is the addition of two parallel trend lines that act as strong areas of

support and resistance. The upper trend line connects a series of highs, while the

lower trend line connects a series of lows. A channel can

slope upward, downward or sideways but, regardless of the direction, theinterpretation remains the same. Traders will expect a given security to trade

between the two levels of support and resistance until it breaks beyond one of the

levels, in which case traders can expect a sharp move in the direction of the break.

Along with clearly displaying the trend, channels are mainly used to illustrate

important areas of support and resistance.
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Chart shows a descending channel on a stock chart; the upper trendline has been

placed on the highs and the lower trendline is on the lows. The price has bounced

off of these lines several times, and has remained range-bound for several months.

As long as the price does not fall below the lower line or move beyond the upper

resistance, the range-bound downtrend is expected to continue.

It is important to be able to understand and identify trends so that you can trade

with rather than against them. Two important sayings in technical analysis are "the

trend is your friend" and "don't buck the trend," illustrating how important trend

analysis is for technical traders.

Channel


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Support and Resistance

Support and resistance represent key junctures where the forces of supply anddemand meet. In the financial markets, prices are driven by excessive supply

(down) and demand (up). Supply is synonymous with bearish, bears and selling.Demand is synonymous with bullish, bulls and buying. As demand increases,prices advance and as supply increases, prices decline. When supply and demandare equal, prices move sideways as bulls and bears slug it out for control.

Support level:

Support is the price level at which demand is thought to be strong enough to

prevent the price from declining further. The logic dictates that as the price

declines towards support and gets cheaper, buyers become more inclined to buy

and sellers become less inclined to sell. By the time the price reaches the support

level, it is believed that demand will overcome supply and prevent the price from

falling below support.

Resistance

Support


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Resistance level

Resistance is the price level at which selling is thought to be strong enough to

prevent the price from rising further. The logic dictates that as the price advances

towards resistance, sellers become more inclined to sell and buyers become lessinclined to buy. By the time the price reaches the resistance level, it is believed that

supply will overcome demand and prevent the price from rising above resistance.

Point of establishment:

Support levels are usually below the current price, but it is not uncommon for a

security to trade at or near support. In addition, price movements can be volatile

and dip below support briefly. Sometimes it does not seem logical to consider a

support level broken if the price closes 1/8 below the established support level. For

this reason, some traders and investors establish support zones. A decline below

support indicates a new willingness to sell and/or a lack of incentive to buy.

Support breaks and new lows signal that sellers have reduced their expectations

and are willing sell at even lower prices.

Resistance levels are usually above the current price, but it is not uncommon for a

security to trade at or near resistance. In addition, price movements can be volatile

and rise above resistance briefly. Resistance does not always hold and a breakabove resistance signals that the bulls have won out over the bears. A break above

resistance shows a new willingness to buy and/or a lack of incentive to sell.

Resistance breaks and new highs indicate buyers have increased their expectations

and are willing to buy at even higher prices.

Round numbers and support and resistance:One type of universal support and resistance that tends to be seen across a large

number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and1,000 tend be important in support and resistance levels because they oftenrepresent the major psychological turning points at which many traders will makebuy or sell decisions.

Buyers will often purchase large amounts of stock once the price starts to falltoward a major round number such as Rs.520, which makes it more difficult for


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shares to fall below the level. On the other hand, sellers start to sell off a stock as itmoves toward a round number peak, making it difficult to move past this upperlevel as well.

Methods to Establish Support and Resistance

Support and resistance are like mirror images and have many commoncharacteristics.

1. Highs and Lows

Support can be established with the previous reaction lows. Resistance can beestablished by using the previous reaction highs.

The above chart for SBI shows a large trading range between Mar-09 and May-09.

Support was established with the March low around 900. In March, April and May,for the three consecutive months the share price shows the upward trend andconsistently moving within the support and resistance channel. The chart showsthat the s.no 3 describing the support level is developed by the joining up of theprevious reaction low with another higher low.

1. RESISTANCE

1. SUPPORT

2. RESISTANCE

2. SUPPORT


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2. Support Equals Resistance

Another principle of technical analysis stipulates that support can turn into

resistance and vice versa. Once the price breaks below a support level, the broken

support level can turn into resistance. The break of support signals that the forcesof supply have overcome the forces of demand. Therefore, if the price returns to

this level, there is likely to be an increase in supply, and hence resistance.

The other turn of the coin is resistance turning into support. As the price advances

above resistance, it signals changes in supply and demand. The breakout above

resistance proves that the forces of demand have overwhelmed the forces of

supply. If the price returns to this level, there is likely to be an increase in demand

and support will be found.

In this example of SBI, we can see that support can turn into resistance and then

back into support. In this we can look that the share price broke up its 4-months

long support level (Rs.1385) in starting days of the November and turns up its

support level into the resistance level. In this way due to some imbalances

between the supply and demand, sometimes these levels get reversed..

3. Trading Range

Trading ranges can play an important role in determining support and resistance as

turning points or as continuation patterns. A trading range is a period of time when

prices move within a relatively tight range. This signals that the forces of supply

and demand are evenly balanced. When the price breaks out of the trading range,

above or below, it signals that a winner has emerged. A break above is a victory

for the bulls (demand) and a break below is a victory for the bears (supply).


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After an extended advance from 115 to 140, Torrent pharma, had a sharp decline to125 levels, and entered into a trading range between 125 and 140 for about 3months. There was a breakout in mid-Apr when the stock briefly poked its headabove 140 levels.

In this manner one can hopefully, understand that whenever the trading range isbroken out the share price goes either of the way, if resistance level is broken andthere is rise of 2-3 % then there .will hopefully be rise in the price of the share, onthe other hand the vice versa condition also applies to the support level break out.

Conclusion

Support and resistance analysis is an important part of trends because it can beused to make trading decisions and identify when a trend is reversing.

Resistance breakout

Channel showing the trading range


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Identification of key support and resistance levels is an essential ingredient tosuccessful technical analysis. If a security is approaching an important supportlevel, it can serve as an alert to be extra vigilant in looking for signs of increasedbuying pressure and a potential reversal. If a security is approaching a resistancelevel, it can act as an alert to look for signs of increased selling pressure andpotential reversal. If a support or resistance level is broken, it signals that therelationship between supply and demand has changed. A resistance breakoutsignals that demand (bulls) has gained the upper hand and a support break signalsthat supply (bears) has won the battle. Support and resistance levels both test andconfirm trends and need to be monitored by anyone who uses technical analysis.As long as the price of the share remains between these levels of support andresistance, the trend is likely to continue.


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Technical Indicators:A Technical indicator is a series of data points that are derived by applying aformula to the price data of a security. Price data includes any combination of the

open, high, low or close over a period of time. Some indicators may use only the

closing prices, while others incorporate volume and open interest into their

formulas.

Indicators are calculations based on the price and the volume of a security that

measure such things as money flow, trends, volatility and momentum. Indicators

are used as a secondary measure to the actual price movements and add additional

information to the analysis of securities.

Indicators serve three broad functions: to alert, to confirm and to predict.

An indicator can act as an alert to study price action a little more closely. If

momentum is waning, it may be a signal to watch for a break of support. Or, if

there is a large positive divergence building, it may serve as an alert to watch

for a resistance breakout.

Indicators can be used to confirm other technical analysis tools. If there is abreakout on the price chart, a corresponding moving average crossover could

serve to confirm the breakout. Or, if a stock breaks support, a corresponding

low in the volume could serve to confirm the weakness.

Some investors and traders use indicators to predict the direction of future

prices.

There are two types of indicators:

Leading: A leading indicator precedes price movements, giving them a predictivequality, a leading indicator is thought to be the strongest during periods of

sideways or non-trending trading ranges. Most represent a form of

price momentum over a fixed look-back period, which is the number of periods

used to calculate the indicator.
http://stockcharts.com/education/GlossaryV.html#Volumehttp://www.investopedia.com/terms/i/indicator.asphttp://stockcharts.com/school/doku.php?id=chart_school:glossary_m#momentumhttp://stockcharts.com/school/doku.php?id=chart_school:glossary_m#momentumhttp://www.investopedia.com/terms/i/indicator.asphttp://stockcharts.com/education/GlossaryV.html#Volume


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Momentum oscillator

Many leading indicators come in the form of momentum oscillators. Generally

speaking, momentum measures the rate-of-change of a security's price. As theprice of a security rises, price momentum increases. The faster the security rises

(the greater the period-over-period price change), the larger the increase in

momentum. Once this rise begins to slow, momentum will also slow.

As a security begins to trade flat, momentum starts to actually decline from

previous high levels. However, declining momentum in the face of sideways

trading is not always a bearish signal.

Lagging: a lagging indicator is a confirmation tool because it follows price

movement, while the lagging indicators are still useful during trending periods.

There are two types of indicator constructions: one that fall in a

bounded range and other that does not. The ones that are bound within a range are

called oscillators - these are the most common type of indicators. Oscillator

indicators have a range, for example between zero and 100, and signal periods

where the security is overbought (near 100) or oversold (near zero). Non-bounded

indicators still form buy and sell signals along with displaying strength or

weakness, but they vary in the way they do this.

APPLICATION OF INDICATORS

The two main ways that indicators are used to form buy and sell signals in

technical analysis is through crossovers and divergence. Crossovers are the most

popular and are reflected when either the price moves through the moving average,

or when two different moving averages cross over each other.
http://www.investopedia.com/terms/r/range.asphttp://www.investopedia.com/terms/o/oscillator.asphttp://www.investopedia.com/terms/c/crossover.asphttp://www.investopedia.com/terms/d/divergence.asphttp://www.investopedia.com/terms/d/divergence.asphttp://www.investopedia.com/terms/c/crossover.asphttp://www.investopedia.com/terms/o/oscillator.asphttp://www.investopedia.com/terms/r/range.asp


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The second way indicators are used is through divergence, which happens when

the direction of the price trend and the direction of the indicator trend are moving

in the opposite direction. This signals to indicator users that the direction of the

price trend is weakening.

Moving Averages

Moving averages are one of the most popular and easy to use tools available to the

technical analyst. They smooth a data series and make it easier to spot trends,

something that is especially helpful in volatile markets. They also form the

building blocks for many other technical indicators and overlays. A moving

average is the average price of a security over a set amount of time. By plotting a

security's average price, the price movement is smoothed out.

Types of Moving Averages

1. Simple moving average 2. Exponential moving average

1. Simple Moving Average (SMA)This is the most common method used to calculate the moving average of prices. It

simply takes the sum of all of the past closing prices over the time period and

divides the result by the number of prices used in the calculation. For example, in a

10-day moving average, the last 10 closing prices are added together and then

divided by 10. One can make the average less responsive to changing prices by

increasing the number of periods used in the calculation. Increasing the number of

time periods in the calculation is one of the best ways to gauge the strength of the

long-term trend and the likelihood that it will reverse.


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The trend is up when the price is above the moving average and the trend is

downward when the price is below the moving averages. This simple illustration

highlights the fact that all moving averages are lagging indicators and will always

be behind the price..as the moving averages are lagging indicators, they fit in the

category of trend following indicators, i.e.; when prices are trending, movingaverages work well.

2. Exponential Moving Average (EMA)

This moving average calculation uses a smoothing factor to place a higher weight

on recent data points and is regarded as much more efficient than the simple

moving average. The most important thing to remember about the exponential

moving average is that it is more responsive to new information relative to thesimple moving average. This responsiveness is one of the key factors of why this is

the moving average of choice among many technical traders.


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3. EMA VS SMA

The difference between an exponential moving average and a simple moving

average is minimal. The Ema is consistently closer to the actual price. On average,

the Ema is 3/8 of a point closer to the actual price than the Sma.

Mainly the Ema are used for the shorter time period to capture change quicker,

whereas on the other hand Sma is preferred for long time periods to identify long-

term trend changes. The more sensitive an indicator is, the more signal will be

given, whereas the less sensitive an indicator is, the fewer the signals but had more

of the reliability.

Moving averages works best when the security is trending and is less effective

when the security is in the trading range


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A comparison of a 15-day EMA and a 15-day SMA for DLF also shows that the

EMA picks up on the trend quicker than the SMA.. By giving more weight to

recent prices, the EMA reacted quicker than the SMA and remained closer to the

actual price. When the change from trend to trading began, the SMA was closer to

the price.

There is no one set length, but some of the more popular lengths include 21, 50,

89, 150 and 200 days as well as 10, 30 and 40 weeks. Short-term traders may look

for evidence of 2-3 week trends with a 21-day moving average, while longer-term

investors may look for evidence of 3-4 month trends with a 40-week moving

average. Trial and error is usually the best means for finding the best length.

Examine how the moving average fits with the price data. If there are too many

breaks, lengthen the moving average to decrease its sensitivity. If the movingaverage is slow to react, shorten the moving average to increase its sensitivity. In

addition, you may want to try using both simple and exponential moving averages.


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Major Uses of Moving Averages

There are many uses for moving averages, but three basic uses stand out:

Trend identification/confirmation Support and Resistance level identification/confirmation Trading Systems

Trend Identification/Confirmation

There are three ways to identify the direction of the trend with moving averages:

direction, location and crossovers.

1. The first trend identification technique uses the direction of the moving averageto determine the trend. If the moving average is rising, the trend is considered up.

If the moving average is declining, the trend is considered down. The direction of a

moving average can be determined simply by looking at a plot of the moving

average or by applying an indicator to the moving average.

2. The second technique for trend identification is price location. The location of

the price relative to the moving average can be used to determine the basic trend. If

the price is above the moving average, the trend is considered up. If the price is

below the moving average, the trend is considered down.

3. The third technique for trend identification is based on the location of the shorter

moving average relative to the longer moving average. If the shorter moving

average is above the longer moving average, the trend is considered up. If the

shorter moving average is below the longer moving average, the trend is

considered down


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Trend no.1, describes that the exponential moving average (12, 26) are rising, thusthe trend is considered up. If the moving average is declining, than the trend isconsidered down. The direction of a moving average can be determined simply bylooking at a plot of the moving average or by applying an indicator to the movingaverage.

Trend no.2, describes the trend identification with the price location. The locationof the price relative to the moving average can be used to determine the basictrend. In this the value of the Ema for12-days and 26-days are respectively 237.8and 222.9, whereas the closing price is 235.55, which is more than the both themoving averages and clearly indicate the uptrend in the security.

Trend no.3, describes the trend identification based on the location of the shortermoving average relative to the longer moving average. In this the shorter Ema isbelow the longer the longer Ema, which indicates the downtrend in the security. Ifthe shorter moving average is above the longer moving average, the trend isconsidered up. If the shorter moving average is below the longer moving average,

the trend is considered down

Trend no.4, this is one of the most important and reliable indicator of describingthe trend of the security, in this indicator whenever there is the intersectionbetween the two moving averages the generate the indication to the future trend.

Trend

no.1Trend

no.2

Trend no.3

Trend no.4 a

Trend no.4 b


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The theory describes that whenever the small moving average intersects the longermoving from above it generates the signal of SELL ,whereas when the smallmoving average intersects the longer moving average from the below then itgenerate the signal of the BUY, the trend 4.a ,shows that the price of the securityis going to decline as the slow Ema has intersected the long Ema from above,whereas the trend 4.b,shows that the price of the security will rise as theintersection of long average is made from slow one from below .

Support and Resistance Levels

Another use of moving averages is to identify support and resistance levels. This is

usually accomplished with one moving average and is based on historical

precedent. As with trend identification, support and resistance level identificationthrough moving averages works best in trending markets. Another major way

moving averages are used is to identify support and resistance levels. It is not

uncommon to see a stock that has been falling stop its decline and reverse direction

once it hits the support of a major moving average. A move through a major

moving average is often used as a signal by technical traders that the trend is

reversing. For example, if the price breaks through the 200-day moving average in

a downward direction, it is a signal that the uptrend is reversing.

CONCLUSION

Moving averages can be effective tools to identify and confirm trend, identify support and

resistance levels, and develop trading systems. However, traders and investors should learn to

identify securities that are suitable for analysis with moving averages and how this analysis

should be applied. Usually, an assessment can be made with a visual examination of the price

chart, but sometimes it will require a more detailed approach. The ADX, Average Directional

Index, is one tool that can help identify securities that are trending and those that are not.

The advantages of using moving averages need to be weighed against the disadvantages. Moving

averages are trend following, or lagging, indicators that will always be a step behind. This is not

necessarily a bad thing though. After all, the trend is your friend and it is best to trade in the

direction of the trend. Moving averages will help ensure that a trader is in line with the current

trend. However, markets, stocks and securities spend a great deal of time in trading ranges,


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which render moving averages ineffective. Once in a trend, moving averages will keep you in,

but also give late signals. Don't expect to get out at the top and in at the bottom using moving

averages. As with most tools of technical analysis, moving averages should not be used on their

own, but in conjunction with other tools that complement them. Using moving averages to

confirm other indicators and analysis can greatly enhance technical analysis.

Moving Average

Convergence/Divergence (MACD)INTRODUCTION

Moving Average Convergence/Divergence (MACD) is one of the simplest and

most reliable indicators available. MACD uses moving averages, which arelagging indicators, to include some trend-following characteristics. These laggingindicators are turned into a momentum oscillator by subtracting the longer movingaverage from the shorter moving average. MACD is a centered oscillator whichresult to plot and form a line that oscillates above and below zero, without anyupper or lower limits

MACD is the difference between a security's 26-day and 12-day ExponentialMoving Averages (EMAs). This is the formula that is used in many popular

technical analysis programs, which is best suited for faster or slower securities.Using shorter moving averages will produce a quicker, more responsive indicator,while using longer moving averages will produce a slower indicator, less prone towhipsaws.

Of the two moving averages that make up MACD, the 12-day EMA is the fasterand the 26-day EMA is the slower. Closing prices are used to form the movingaverages. Usually, a 9-day EMA of MACD is plotted alongside to act as a triggerline. A bullish crossover occurs when MACD moves above its 9-day EMA, and abearish crossover occurs when MACD moves below its 9-day EMA. The

histogram represents the difference between MACD and its 9-day EMA. Thehistogram is positive when MACD is above its 9-day EMA and negative whenMACD is below its 9-day EMA.

If MACD is positive and rising, then the gap between the 12-day EMA and the 26-day EMA is widening. This indicates that the rate-of-change of the faster moving


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average is higher than the rate-of-change for the slower moving average. Positivemomentum is increasing, indicating a bullish period for the price plot.

If MACD is negative and declining further, then the negative gap between thefaster moving average and the slower moving average is expanding. Downwardmomentum is accelerating, indicating a bearish period of trading.

MACD centerline crossovers occur when the faster moving average crosses theslower moving average.

MACD BULLISH SIGNAL

MACD generates bullish signals from three main sources:

1. Positive Divergence2. Bullish Moving Average Crossover3. Bullish Centerline Crossover

1. Positive Divergence

A Positive Divergence occurs when MACD begins to advance and the security is

still in a downtrend and makes a lower reaction low. MACD can either form as a

series of higher Lows or a second Low that is higher than the previous Low.

Positive Divergences are probably the least common of the three signals, but are

usually the most reliable, and lead to the biggest moves.

2. Bullish Moving Average Crossover

A Bullish Moving Average Crossover occurs when MACD moves above its 9-day

EMA, or trigger line. Bullish Moving Average Crossovers are used occasionally to

confirm a positive divergence. A positive divergence can be considered valid when

a Bullish Moving Average Crossover occurs after the MACD Line makes its

second "higher Low".

Sometimes price filter can be used with MACD. An example of a price filter would

be to buy if MACD breaks above the 9-day EMA and remains above for three days.

The buy signal would then commence at the end of the third day.

3. Bullish Centerline Crossover


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A Bullish Centerline Crossover occurs when MACD moves above the zero lineand into positive territory. This is a clear indication that momentum has changedfrom negative to positive or from bearish to bullish. After a Positive Divergenceand Bullish Centerline Crossover, the Bullish Centerline Crossover can act as aconfirmation signal. Of the three signals, moving average crossover are probablythe second most common signals.

The stock formed the lower low in mid of the march (red line), but MACD traded

above zero to form a bullish centerline crossover. At the time of the bullish

centerline crossover, the stock was trading at 270 and went above to 360.the

bullish moving average crossover can be seen at the mid of the December ,when

the MACD signal crosses the trigger line from the below. The chart also shows that

bullish centerline crossover in mid Dec which generates the bullish signal for thescrip and also at the same point the MACD signal crossovers the trigger line from

the below which also generates the BUY signal forthe security.

POSITIVE DIVERGENCE


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MACD Bearish Signals

MACD generates bearish signals from three main sources. These signals are mirrorreflections of the bullish signals:

1. Negative Divergence2. Bearish Moving Average Crossover3. Bearish Centerline Crossover

1. Negative Divergence

A Negative Divergence forms when the security advances or moves sideways, andthe MACD declines. The Negative Divergence in MACD can take the form ofeither a lower High or a straight decline. Negative Divergences are probably the

least common of the three signals, but are usually the most reliable, and can warnof an impending peak.

There are two possible means of confirming a Negative Divergence. First, theindicator can form a lower Low. Second, a Bearish Moving Average Crossover(which is explained below) can act to confirm a negative divergence . WhenMACD breaks below its 9-day EMA, it signals that the short-term trend for theindicator is weakening, and a possible interim peak has formed.

2. Bearish Moving Average Crossover

The most common signal for MACD is the moving average crossover. A BearishMoving Average Crossover occurs when MACD declines below its 9-day EMA.Not only are these signals the most common, but they also produce the most falsesignals. As such, moving average crossovers should be confirmed with othersignals to avoid whipsaws and false readings.

3. Bearish Centerline Crossover

A Bearish Centerline Crossover occurs when MACD moves below zero and intonegative territory. This is a clear indication that momentum has changed frompositive to negative or from bullish to bearish. The centerline crossover can act asan independent signal, or confirm a prior signal such as a moving average


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crossover or negative divergence. Once MACD crosses into negative territory,momentum, at least for the short term, has turned bearish.

If MACD is positive for many weeks, begins to trend down, and then crosses intonegative territory, it would be bearish. However, if MACD has been negative for afew months, breaks above zero, and then back below, it might be a correction.

This chart shows that the NIFTY is having the upward trend from the mid Marchand consistently advancing to the new highs, whereas the initial phase of Mayshows the sideways movement (price movement in a particular range) and at thesame time the MACD indicator is also showing the trend of the negative

divergence, where the indicator has formed the higher low. This indicate that theprice is tend to fall in this vary security and will lead it toward the bearish market.

Sidewa s movement

Negative divergence


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MACD-Histogram

The MACD-Histogram represents the difference between the MACD and itstrigger line, the 9-day EMA of MACD. The plot of this difference is presented as a

histogram, making centerline crossovers and divergences easily identifiable.

A centerline crossover for the MACD-Histogram is the same as a moving averagecrossover for MACD..

If the value of MACD is larger than the value of its 9-day EMA, then the value onthe MACD-Histogram will be positive. Conversely, if the value of MACD is lessthan its 9-day EMA, then the value on the MACD-Histogram will be negative.

Sharp increases in the MACD-Histogram indicate that MACD is rising faster than

its 9-day EMA and bullish momentum is strengthening. Sharp declines in theMACD-Histogram indicate that MACD is falling faster than its 9-day EMA andbearish momentum is increasing.

Usually, a move in the MACD is preceded by a corresponding divergence in theMACD-Histogram.

The first point shows a sharp positive divergence in the MACD-Histogram thatpreceded a Bullish Moving Average Crossover.


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1. On the second point, the MACD continued to new Highs but the MACD-Histogram formed two equal Highs. Although not a textbook case ofPositive Divergence, the equal High failed to confirm the strength seen inthe MACD.

2. A Positive Divergence formed when the MACD-Histogram formed a higherLow and the MACD continued lower.

3. A Negative Divergence formed when the MACD-Histogram formed a lowerHigh and the MACD continued higher.

The chart shows the few of the examples of the divergence. The MACD histogram method

generates the better understanding of the trends and reversal with the more accuracy on the part oft describing the divergences.

The point of the positive divergence clearly shows that as and when the difference

between two moving averages is getting reduced. Thus the positive divergence

very clearly generates the indication of the buy, whereas the negative divergence

on the contrary gives the signal of sell.

Positive divergence

Negative divergence

Negativ


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RELATIVE STRENGTH INDEX

The relative strength index (RSI) is another one of the most used and well-knownmomentum indicators in technical analysis. RSI helps to signal overbought andoversold conditions in a security. The indicator is plotted in a range between zeroand 100. A reading above 70 is used to suggest that a security is overbought, whilea reading below 30 is used to suggest that it is oversold. This indicator helpstraders to identify whether a securitys price has been unreasonably pushed to

current levels and whether a reversal may be on the way.

The standard calculation for RSI uses 14 trading days as the basis, which can be

adjusted to meet the needs of the user. If the trading period is adjusted to use fewerdays, the RSI will be more volatile and will be used for shorter term trades.

USE OF RELATIVE STRENGTH INDEX

1. Overbought/Oversold

Wilder recommended using 70 and 30 and overbought and oversold levelsrespectively. Generally, if the RSI rises above 30 it is considered bullish for theunderlying stock. Conversely, if the RSI falls below 70, it is a bearish signal. Some

traders identify the long-term trend and then use extreme readings for entry points.If the long-term trend is bullish, then oversold readings could mark potential entrypoints.

2. Divergences

Buy and sell signals can also be generated by looking for positive and negative

divergences between the RSI and the underlying stock. For example, consider a

falling stock whose RSI rises from a low point of (for example) 15 back up to say,

55. Because of how the RSI is constructed, the underlying stock will often reverseits direction soon after such a divergence. As in that example, divergences that

occur after an overbought or oversold reading usually provide more reliable

signals.

3. Centerline Crossover
http://www.investopedia.com/terms/r/rsi.asphttp://www.investopedia.com/terms/r/rsi.asp


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The centerline for RSI is 50. Readings above and below can give the indicator abullish or bearish tilt. On the whole, a reading above 50 indicates that averagegains are higher than average losses and a reading below 50 indicates that lossesare winning the battle. Some traders look for a move above 50 to confirm bullishsignals or a move below 50 to confirm bearish signals.

Here is the example showing the utilization of the RSI indicator and the predictionsfor the security.

The above chart shows that the multi arc shows the two trends in this example. In

nov-08, RSI reached oversold levels to mark the low around 43. The next extreme

reading (oversold) occurred in feb-09.RSI reached oversold levels in the mid

march also and ends up with moving below the RS.35 level. The chart also shows

the positive divergence, as the price of the security kept on decline whereas the

RSI indicator was rising, which indicates the further upward movement in the

security price.

Positive divergenceOversold


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RATE OF CHANGEThe Rate of Change (ROC) is a simple technical indicator that displays the percentdifference between the current price and the price n-time periods ago.

Rate-of-change (ROC) is a centered oscillator that also fluctuates above and belowzero. When price increases the ROC moves up and when price decreases the ROCfalls. The greater the change is in the price, the greater change is in the ROC.

The ROC could be used as any momentum technical indicator by analyzing

positive and negative divergence, looking for high lows and zero line crossovers.The ROC could be used to define overbought and oversold markets. The higherROC is considered a more overbought security and the lower ROC is the moreoversold security.

ROC measures the percentage price change over a given time period. Forexample: 20 day ROC would measure the percentage price change over the last 20days. The bigger the difference between the current price and the price 20 daysago, the higher the value of the ROC Oscillator. When the indicator is above 0, thepercentage price change is positive (bullish). When the indicator is below 0, thepercentage price change is negative (bearish).


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This indicator shows the overbought and oversold levels for the security and

generates the better idea about the current position of the security and future value

of the security.

In this chart for the BSE Sensex, ROC indicator touches the oversold level in thelast week of Jan and which generates the signal for making the BUY in the

security and which has been followed after this indicator, whereas in the end of the

Mar the overbought signal is identified and which provides with the indication of

over demand and requires the SELL signal to come in play.

The s.no.1 shows the negative divergence signal as the price of the security is

rising whereas the ROC indicator shows the downward trend. It generates the

signal for SELL in near future.

OverboughtOversold

S.NO.1


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TRIX

TRIX is a momentum indicator that displays the percent rate-of-change of a tripleexponentially smoothed moving average of a security's closing price. Oscillatingaround a zero line, TRIX is designed to filter out stock movements that areinsignificant to the larger trend of the stock. The user selects a number of periods(such as 15) with which to create the moving average, and those cycles that areshorter than that period are filtered out.

The TRIX is a leading indicator and can be used to anticipate turning points in atrend through its divergence with the security price. Likewise, it is common to plota moving average with a smaller period (such as 9) and use it as a "signal line" to

anticipate where the TRIX is heading. TRIX line crossovers with its "signal line"can be used as buy/sell signals as well. a positive value suggests momentum isincreasing while a negative value suggests momentum is decreasing. Manyanalysts believe that when the TRIX crosses above the zero line it gives a buysignal, and when it closes below the zero line, it gives a sell signal. Also,divergences between price and TRIX can indicate significant turning points in themarket.

APPLICATION

TRIX measures the rate-of-change of closing prices; a positive TRIX value isinterpreted as a steady rise in the closing price of a security. A positive TRIX isthus akin to a positive trending price, allowing the indicator to act as a buy signalwhenever it crosses up above the zero line. Similarly, crossing below the zero linesuggests the price is tending to close down at the end of each period, which can bea sell signal.

The "signal line" mentioned earlier is also a useful buy/sell indicator. Since thesignal line period is shorter, a cross above it suggests that recent stock prices are

closing much higher. A buy signal is triggered when TRIX crosses above its signalline, and a sell signal is triggered when TRIX crosses below its signal line. Thismethod can generate false signals during sideways price movements, so it worksbest when prices are trending. It is therefore wise to use TRIX in tandem withother indicators for confirmation.


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Example

In the BSE Sensex, three bullish crossovers between the TRIX and its "signal line"were all followed by up trends. These crossovers represented ideal buy points, forthey quickly anticipated an increasing demand for the security.

STOCHASTIC OSCILLATOR

The stochastic oscillator is one of the most recognized momentum indicators usedin technical analysis. The idea behind this indicator is that in an uptrend, the priceshould be closing near the highs of the trading range, signaling upward momentumin the security. In downtrends, the price should be closing near the lows of the

trading range, signaling downward momentum.

The stochastic oscillator is plotted within a range of zero and 100 and signalsoverbought conditions above 80 and oversold conditions below 20. The stochasticoscillator contains two lines. The first line is the %K, which is essentially the rawmeasure used to formulate the idea of momentum behind the oscillator. The secondline is the %D, which is simply a moving average of the %K. The %D line is


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considered to be the more important of the two lines as it is seen to produce bettersignals. The stochastic oscillator generally uses the past 14 trading periods in itscalculation but can be adjusted to meet the needs of the user.

There are three types of Stochastic Oscillators: Fast, Slow, and Full.

The Fast Stochastic Oscillator is made up of %K (fast) and %D (fast) in thisthe %K(fast) is found by using the formula, whereas the %D(fast) iscalculated by taking the 3-day SMA of the %K(fast).The driving forcebehind both Stochastic Oscillators is % K (fast

The Slow Stochastic Oscillator is generated by %K (slow) and %D (slow).To find %K (slow) in the Slow Stochastic Oscillator, a 3-day SMA wasapplied to %K (fast). This 3-day SMA slowed (or smoothed) the data toform a slower version of %K (fast).To form the trigger line, or %D (Slow) in

the Slow Stochastic Oscillator, a 3-day SMA was applied to %K (Slow). The Full Stochastic Oscillator takes three parameters. The first parameter is

the number of periods used to create the initial %K line and the lastparameter is the number of periods used to create the %D (Full) signal line.What's new is the additional parameter, the one in the middle. It is a"smoothing factor" for the initial %K line. The %K (full) line that getsplotted is an n-period SMA of the initial %K line (where n is equal to themiddle parameter).

APPLICATION OF STOCHATICS:

Readings below 20 are considered oversold and readings above 80 are consideredoverbought. However, a reading above 80 was not necessarily bearish or a readingbelow 20 bullish. A security can continue to rise after the Stochastic Oscillator hasreached 80 and continue to fall after the Stochastic Oscillator has reached 20.

Buy and sell signals can also be given when %K crosses above or below %D.

However, crossover signals are quite frequent and can result in a lot of whipsaws.

One of the most reliable signals is to wait for a divergence to develop fromoverbought or oversold levels. Once t

Naresh Chaudhary Sip.

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