Pavan technicals

8/8/2019 Pavan technicals

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TECHNICAL ANALYSIS

P.G.Kulkarni


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DEFINITION:

Technical Analysis is the study of:

PRICE.

VOLUME. OPEN INTEREST.

It is the study of market action through the

help of charts and other technical indicators

so as to forecast the trend.


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ASSUMPTIONS:

Current Price of an underlying asset

discounts all information.

Price always moves in trends.

History repeats often.


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DIFFERENCES:

FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS

1. TIME CONSUMING. 1. QUICK STUDY.

2. STUDY OF CAUSE. 2. STUDY OF EFFECT.

3. INTRINSIC VALUE. 3. STUDY OF CHARTS.

4. INCLUDES ECONOMIC,

INDUSTRY AND COMPANY

ANALYSIS.

5. APPLIED FOR FEW

MARKETS UNDER STUDY.

4. PRICE, VOLUME AND OPEN

INTEREST ANALYSIS.

5. CAN BE APPLIED TO ANY

MARKET AND INSTRUMENT.


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ADVANTAGES:

Can be used on any markets and on any

underlying asset.

Takes care of fundamental analysis. Helpful for short term traders and

speculators.

Helps in understanding market psychology. Helps in economic forecasting.


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LIMITATIONS:

It is a Probabilistic study and not deterministic

study.

Chart Patterns are very subjective in nature.

Does not works accurately for illiquid markets

and underlying assets with controlled regime.

Past may not be the indicator of future.

Random walk theory. Contradicting views by different indicators.


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DIFFERENCES IN APPLICABILITY:

Technical analysis as applied to stock

Markets is same to even derivative markets.

However the following things shall be kept

In mind: Pricing Structure.

Time period.

Margin requirements.

Timing is everything in futures market,where buy and hold strategy does notwork.


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DOW THEORY

CHARLES DOW&

NELSON


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DOW THEORY:

Ideas of Charles Dow, propounded byNELSON.

Assumptions ofDow theory:

a) The Market indices discounts everything.

b) The market has 3 trends, namely:

1. Primary Trend. (Major trend).

2. Secondary Trend. (Intermediate trend).

3. Minor Trend. (Short term trend).


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STUDY OF VARIOUS TRENDS:

1. THE PRIMARY OR MAJOR TREND:Dow compares the major trend to a

TIDE, where a major uptrend is

represented by patterns of rising

peaks and troughs and a downtrend is

characterized by lower peaks and

troughs.

A MAJOR TREND LASTS FOR MORETHAN AN YEAR OR SEVERAL YEARS.


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2. THE SECONDARY OR INTERMEDIATE TREND:

DOW compares the intermediate trend to

waves that makeup tides and they represents

correction in the Primary trend.

AN INTERMEDIATE TREND GENERALLYLASTS FOR THREE WEEKS TO THREEMONTHS. THESE INTERMEDIARY

CORRECTIONS GENERALLY RETRACES 1/3OR 1/2 OR 2/3 OF THE PREVIOUS MOVE.


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3. THE MINOR OR SHORT TERM TREND:DOW compares the minor or short term

trend to ripples on the waves. Minor

trend represents fluctuations in theintermediate trends.

A MINOR TREND GENERALLY LASTSFOR LESS THAN THREE WEEKS.


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FOCUS ON MAJOR TRENDS:FOCUS ON MAJOR TRENDS:

Dow suggests to focus on the big pictureDow suggests to focus on the big picturei.e to focus on the MAJOR TREND.i.e to focus on the MAJOR TREND.

The major trend consists of three phasesThe major trend consists of three phases

Namely:Namely:a)a) ACCUMULATION PHASE.ACCUMULATION PHASE.

b)b) PUBLIC PARTICIPATION PHASE.PUBLIC PARTICIPATION PHASE.

c)c) DISTRIBUTION PHASE.DISTRIBUTION PHASE.


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VOLUME MUST CONFIRM THE TREND!!!

According to DOW, Volume must confirmUptrend by expanding as Price moves

Higher and diminishes with decrease in

Price.In a Downtrend, Volume should expand as

Price drops and diminish as they rally.


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E

FAILURE SWING:B

A

C

D

The rally at point B is higher than point A, but the rally at

point C fails to exceed the previous rally at point B. This

indicates reversal of uptrend and the point below the

neck line i.e. D E indicates a failure swing.


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FAILURE SWING:C

BE

DA

F

H

The rally at point B is higher than point A, and the

rally at point C is higher than that of rally at point B;

But it falls below D and few theorists sells at a break

out Point below E.

While others would like to wait to see a lower high at

point G to confirm the lower high as well as lower

lows and then sell at a Point below H.

G


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A trend is said to be at effect until it gives definite

signals that it has reversed:

A trend in motion continues to be in motion until anyexternal force causes it to change direction.

Various technical tools help the analyst to identify

signals of trend reversals.

A trend before reversing, slows down and then

changes direction.

Volume confirmation of a trends direction reversal isto be considered.


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CRITICISMS OF DOW THEORY:

Dow theory generally misses 20% to 25% of a

move before generating a signal.

Use of closing prices (Line charts).

Signals in Dow theory are generally generated

during the second phase of the uptrend.

It was primarily used as an indicator of Economy

which was substituted to stocks and other underlying

assets.

Subjectivity and difficulty in distinguishing the

various phases of trends.


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Dow theory applied to Derivatives instrument:

Dow assumed most of the investors only trade

major trend; Whereas in reality traders in futuresmarket generally trend intermediate trend which was

unimportant according to Dows assumption.

Minor Swings are more important than MajorSwings.

Keeping in mind the above differences, Dow theory

can be applied even to derivatives market.


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CHART CONSTRUCTION:

Price and Volume data are generally studied by

using graphical representations called charts.

Different types of charts include;

a) LINE CHARTS.

b) BAR CHARTS.

c) CANDLE STICKS.


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OPEN INTEREST:

Open Interest is the total number of outstanding

future contract that are held by the marketparticipants at the end of the day.

Open interest is the number of outstanding

contracts held by the longs or the shorts and not the

total of the both.

Generally Volume and Open interests will be small

at the early stages of futures contract life and

expands as it reaches the maturity period and againdrop during close to expiration stage.

For trading purpose, avoid stocks with lower

volumes and lower open interest.


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TREND ANALYSIS:

ALWAYS TRADE IN THE DIRECTION OFTHE TREND

TREND IS YOUR FRIEND

NEVER BUCK THE TREND

It is the direction of the PEAKS and

TROUGHS that constitutes market trend.

A Trend is simply the indicator of the direction

of the market.


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TYPES OF TREND:

AN UPTREND.Series of successive higher peaks and

troughs.

A DOWN TREND.

Series of declining peaks and troughs.

SIDEWAYS TREND.

Series of Horizontal peaks and troughs.


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TREND STRATEGY:

In an Uptrend, go LONG (BULLISH). In a Downtrend, go SHORT (BEARISH).

In a Sideways trend, DO NOTHING.

Trend is classified into 3 categories

based on their time period:

a) Major Trend.

b) Intermediate Trend.

c) Minor Trend.


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SUPPORT AND RESISTANCE:

RESISTANCE:

It is an area or level on the chart where Selling

pressure is sufficiently strong enough to

overcome buying interest i.e. Supply > Demand.

In short, the peaks or reaction highs are called

as Resistance.

For an Uptrend to continue, each successive

highs, (Resistances) must be greater than thepreceding highs.


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CAUTION:

If the corrective dip in an uptrend

comes all the way to previous low or

breaches it, it is an early signal of

reversal of a trend (downward move)

or beginning of sideway movement.


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BETTER CONFIRMATION:

More the trading that takes place in the

Support or Resistance area, more significant it

becomes.

Amount of time spent in the support or

resistance area is a sign of better confirmation.

Volume also acts as a pivotal point in

determination of better future prices and

confirms better the support or resistance levels.


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Support becomes resistance and vice versa ifa Support level is penetrated (Broken out) with a

significant margin and similarly in case of a

break out of resistance levels.

In an uptrend, previous resistance levels

which have been broken by a significant margin

become supports.

In a downtrend, violated support levelsbecomes resistance levels on subsequent

bounces.


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TREND LINES:

It is a simple but very valuable technical tool.

Uptrend:It is a straight line drawn from left to right

along with every successive lows.

Downtrend:

It is a straight line drawn from left to right.

along with every successive highs.

AN UPTREND OR A DOWNTREND SHALL BE

CONFIRMED BY JOINING OF ATLEAST

3POINTS.

Days low or highs shall be considered for drawing a trend line.


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TREND LINES: Trendline shall include all price action.

Trendline break on a closing basis is considered

more valid than on intraday basis.

Valid trend line break is generally considered with

a limit of 3% to 5% from the neckline. Deciding the levels of tolerance is left to the risk

levels of the investor.

A minimum 2day close below or above the trend

line break is also generally considered.

Few of them even consider a weekly break of

trend line as a valid signal.


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Steepness of the Trendline:

Generally most important trendlines approximatean average slope of 45

0.

Generally if trendlines are too steep or flat, it may

not be an indication of a sustainable Trendline

projections and the same shall not be trusted for.

Multiple trends like major, intermediate and short

term are studied in tandem for a better picture.

Thus it is said, Remember the Rembrandt i.e.

the big picture.


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CHANNEL LINES:

Channel line also called as Return line is an areabetween two parallel lines i.e. the basic trendline and

the channel line drawn parallel to the basic trendline.

Generally on an Upward trendline, supports form the

basic trendline and the resistance the upper channel.

Confirmation of an existence of channel is proved by

the price action within the two parallel lines.

Failure to reach the channel line in an upward trendis an early signal of beginning of weakness.


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CHANNEL LINES:

Once a breakout occurs from an existing price

channel, prices usually travel a distance equal to the

width of the channel from the point at which trend line

is broken.

Out of the 2 trendlines constituting a channel, the

basic trendline is by far the most important and reliable

one.

The Channel line is a secondary use of the trendline

technique.

The failure to reach the upper end of the channel line

is an early warning that the lower line (Basic trend line)

may be broken in the near future.


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PERCENTAGE RETRACEMENT LINES:

After a particular move, Prices generally retracea portion of the previous move, before resuming

the trend in the original direction.

These counter trend moves are called as

retracements and are generally to the extent of50% of the previous move.

Besides 50% retracements, there are minimum

(1/3) and maximum (2/3) retracements too.

Percentage retracements are applicable to all

types of trends.


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PERCENTAGE RETRACEMENT LINES:

If the prior trend is to be maintained,66.67% or 2/3 retracement is a critical point

not to be breached.

66.67% retracement is low risk area to buy

in an uptrend or to sell on a downtrend.

If prices move beyond the 66.67%

retracement, then the odds favour a trend

reversal rather than just a retracement. The

move in such situations usually retrace 100%

of the previous trend.


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GAPS: It is the area on the bar chart where no trading has taken

place.

UPSIDE GAPS are gaps opened due to Open price being

greater than the previous days high and that upside gap

opened are not filled in during the day.

DOWN SIDE GAPS are gaps opened due to days high

price being below the previous days low.

Upside gaps are signs of Market strength whereas

Downside gaps are signs of market weakness.

Gaps on weekly and monthly charts are considered more

significant to that of gaps on a daily chart.


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TYPES OF GAPS:TYPES OF GAPS:

BREAK AWAY GAPS.BREAK AWAY GAPS.

RUNAWAY GAPS.RUNAWAY GAPS.

EXHAUSTION GAPS.EXHAUSTION GAPS.


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BREAKAWAY GAPS:

It usually occurs at the end of an important price

pattern and signifies beginning of an important marketmove.

The breaking of an important RESISTANCE or

SUPPORT through a breakaway gap is a solid

confirmation of a beginning of a major and steep upmove or a downward move.

Break away gaps usually occur with heavy volumes.

Break away gaps are generally not filled.

Break away gaps on the upside acts as an support

and on a downtrend acts as resistance.


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RUNAWAY GAPS:

It is also called as Measuring gaps which usually

occurs at the midway of a major move.

It is a signal of markets moving effortlessly with

comfortable volumes.

It signifies the continuation of the major move which

started with the Breakaway gap.

It is also used to set up price targets.

Run away gaps are also not filled.

Run away gaps on the upside acts as an support

and on a downtrend acts as resistance.


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EXHAUSTION GAPS:

It usually occurs at the END of a major move.

An analyst should expect runaway gaps after break

away and Exhaustion gap after Run away gaps.

It signifies the END of the major move which started

with the Breakaway gap and continued with a Run

away gap.

It is used to exit positions on the either side.

Exhaustion gaps are generally filled.

Exhaustion gaps on the upside or downside acts as

the neckline and breach of the same is a strong signal

of reversal.


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ISLAND REVERSAL:

It occurs after an exhaustion gap, generally with a

time period of 2 days or weeks.

An Exhaustion gap to the upside followed by abreakaway gap to the downside completes the ISLAND

REVERSAL PATTERN and indicates reversal of trend.


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CHART PATTERNS:

It is a formation that appears on a price chart that

can be classified into different categories which havefuture predictive value.

Chart Patterns can be classified into 2 broad

categories, namely:

a) Reversal Patterns.

b) Continuation Patterns.

Volume plays a very important role in confirming the

above pattern formations and future predictions.


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REVERSAL PATTERNS:

HEAD AND SHOULDER:

There shall exist a prior Uptrend before the

formation of an Head and Shoulder pattern.

The peak of the head shall be higher than the peaks

of the either shoulders.

Generally peaks are with heavy volumes and

troughs with lighter volumes.

Generally rally into the newer highs is on lighter

volumes in comparison with the previous highs rally.

Breach of neckline which forms the support line is

important.


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REVERSAL PATTERNS:

Breach of neckline is considered on the closing basis and

not on intraday basis. Volume should increase on the breaking of the neckline.

3% to 5% breach below the neckline is also considered

for better confirmation.

Usually a Return move develops which is a bounce back

to the bottom of the neckline (support) breached, now

acting as a stiff Resistance.

If the initial breaking of the neckline is on heavy volumes,

the probability of bounce back or the return move is less

and vice versa.

After the breach of neckline, prices should not re-cross

the neckline again, if crossed it is a failure pattern.

HEAD AND SHOULDER:


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HEAD AND SHOULDER:

MEASURING IMPLICATIONS:

Price Objective is based on the Height of the Pattern.

The distance from the top of the head to the neckline

(Vertical line) is the expected price downtrend from the

point of breach of the neckline.

The above Price objective is a minimum target and themaximum price target might be the retracement of the

full previous move. (100% RETRACEMENT OF

PREVIOUS MOVE)

and 2/3 retracements of previous move can also beconsidered for the price targets to adjust.

Gaps, Previous trends break, Previous supports and

resistances shall also be considered while fixing the

price target.


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INVERSE HEAD AND SHOULDER:

It is a mirror image of the Head andShoulder top Pattern.

The volume from the head should see

heavier volumes and a burst of volumesin breaking of the neckline.

Return move back to the neckline

acting as support line is seen more oftenin a inverse pattern rather on top pattern.



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MEASURING IMPLICATIONS:

Price Objective is based on the Height of the Pattern.

The distance from the top of the inverted head to the

neckline (Vertical line) is the expected price upside from

the point of breach of the neckline.

The above Price objective is a minimum target and themaximum price target might be the retracement of the

full previous move. (100% RETRACEMENT OF

PREVIOUS MOVE)

and 2/3 retracements of previous move can also beconsidered for the price targets to adjust.

Gaps, Previous trends break, Previous supports and

resistances shall also be considered while fixing the

price target.

COMPLEX HEAD AND SHOULDER PATTERNS:


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COMPLEX HEAD AND SHOULDER PATTERNS:

It is a variation of Head and Shoulder Pattern which are

rarely found.

These are patterns where 2heads may appear along with

a right and a left shoulder.

It can also be a double left and a double right shoulder.

They have the same forecasting implications to that ofNormal Head and shoulder pattern.

A lot of anticipatory buying takes place during the

formation of the right shoulder and aggressive traders take

positions before the confirmation of the pattern itself. If the initial positions prove right, additional positions

can be added at the breach of neckline.


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CAUTION:CAUTION:

HEAD AND SHOULDER PATTERN CANHEAD AND SHOULDER PATTERN CANALSO ACT AS A CONSOLIDATIONALSO ACT AS A CONSOLIDATION

PATTERN, RATHER THAN REVERSALPATTERN, RATHER THAN REVERSALPATTERN.PATTERN.

TRIPLE TOPS AND BOTTOMS:


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TRIPLE TOPS AND BOTTOMS:

It is a slight variation of Head and Shoulder pattern

which is very rare as a chart pattern.

The three Peaks or Troughs in the Triple Top or a Triple

bottom formation is at the same level.

Volumes tend to decline with each successive peaks and

increase at the breakout point.

The measuring technique and the return move is same

as that of the Head and Shoulder Pattern.

A Triple bottom is a mirror image of triple top.

Study of previous trend before the formation of a tripletop or a triple bottom is crucial.


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DOUBLE TOPS AND BOTTOMS:


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It is a common reversal chart pattern found very

frequently.

This pattern must have two peaks at about the same

level.

Volumes is generally low on the second peak and picks

up on the break of the neckline.

The measuring technique and the return move is same

as that of the Head and Shoulder Pattern.

A Double bottom is a mirror image of double top.

Study of previous trend before the formation of a doubletop or a double bottom is crucial.


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A double top is commonly referred to as M formation

and a double bottom as W formation. A normal pull back from a previous peak before the

resumption of the uptrend should not be studied as Double

top formation. (Till the breach of neckline, the double top

formation is not complete) The longer the time period between the peaks or

bottoms and greater the height, more reliable is the chart

pattern.

Generally Valid Double tops and bottoms should at leasthave a months gap between the two peaks or troughs.

VARIATIONS FROM THE IDEAL PATTERNS:


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VARIATIONS FROM THE IDEAL PATTERNS:

Use of filters by traders to deal with variations in chart

patterns.

On occasions the second peak will not reach the levels

of first peak.

Most chartists want a close beyond the previous

resistance on a closing basis and not on intra day basis.

Percentage penetration criteria of 3% to 5% is also

considered.

The two day penetration rule is also used as a time filter.

A Friday close beyond the previous peak is alsoconsidered.

SAUCERS AND SPIKES:


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SAUCERS AND SPIKES:

It is also called as rounding bottoms.

It is a very slow and gradual turn from down to side

ways and then to an uptrend.

Longer they last, more significant they are.

Spikes are V patterns that happens very quickly with

little or no transition period.

They usually occur in markets which so over extended,

that a sudden piece of adverse news will turn the trend

abruptly without giving signals of slowing down or a turn

in trend. Volumes is the only tool that can help in predicting a

Spike.


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CONTINUATION PATTERNS:

It is an indication of a sideways price action, which is a

pause in the prevailing trend and the next move will be inthe same direction of the trend which preceded the

formation.

Continuation patterns are generally of a shorter duration

in comparison to that of reversal patterns.


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SYMMETRICAL TRIANGLES:

Symmetric Triangles are also called as COILS

These triangles show 2 Converging trend lines, the Upper linedescending and the Lower line ascending.

The Vertical line measuring the height of the pattern is referred to

as BASE. (AB)

The point of intersection of the above 2 trend lines is called as theAPEX. (C)

A close outside either of the trend lines, completes the pattern.

B

A

C


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ASCENDING TRIANGLES:

It is similar to that of a Symmetric Triangle with a rising lower line

except for the flat or horizontal Upper line. The Vertical line measuring the height of the pattern is referred to

as BASE.

The point of intersection of the above 2 trend lines is called as the

APEX.


This is generally a Bullish Pattern.

B

AC


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DESCENDING TRIANGLES:

It is similar to that of a Symmetric Triangle with a declining Upper

line except for the flat or horizontal Down line. The Vertical line measuring the height of the pattern is referred to

as BASE.

The point of intersection of the above 2 trend lines is called as the

APEX.


This is generally a Bearish Pattern.

B

A

C


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TRIANGLES:

A Symmetric triangle pattern is a continuation pattern

which represents pause in the existing trend after whichthe previous trend continues.

The study of previous trend before the formation of a

triangle is highly significant for accurate interpretation.

If the previous trend were to be an uptrend, the

implications of symmetric triangle is bullish and if it

were to be a down trend, it would have bearish

implications.

A triangle should have minimum 4 reversal points i.e.

each trend line must be touched at least twice. Few of

them also have 6 reversal points.

MEASUREMENT OF TRIANGLES


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MEASUREMENT OF TRIANGLES:

As a general rule prices should break out in the

direction of the Prior Trend somewhere between 2/3 to

3/4 of the Horizontal width of the triangle.

Horizontal width is the distance between the BASE at

the left of the pattern to the APEX at the right of the

pattern.

If prices remain within the triangle beyond the 3/4 point,

then the triangle loses its significance and prices may

reach to the APEX point.

Trend reversal is given by closing penetration of one ofthe trendlines.

Return move is rarely found in Triangles, and the broken

line acts as Support in an up trend and resistance in a

down trend.

TRIANGLES:


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TRIANGLES:

Volume should diminish as the price swings narrow

within the triangle.

Volume should pick up noticeably at the penetration

point.

Measurement of symmetrical triangles are based on the

Height of the BASE or by drawing a parallel line upwardfrom the top of the BASE, parallel to the lower line.

B

A

C

D

VOLUME PATTERNS ON TRIANGLES


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VOLUME PATTERNS ON TRIANGLES:

In an Ascending Triangle pattern, volumes

tend to increase on bounces and

contracts on dips.

In a Descending Triangle, Volumes should

be heavier on the downside and lighter

during the bounces.

A Triangle is considered to be an

intermediate continuation pattern which

generally take a month to 3months for its

formation.

BROADENING PATTERNS:


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It is an inverted triangle or triangle turned backwards.

A Broadening pattern should not show a convergingtrend line Pattern.

Volume tend to behave the opposite way as to a triangle

wherein it tends to expand along with the wider price

swings.

It usually occurs at market tops which shows three

successive higher peaks and two declining troughs.

The violation of the second trough completes the

formation of the Broadening pattern.

An Expanding pattern is generally a bearish signal as it

appears at the market top.

BROADENING PATTERNS


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B

A

C

D

F

E


FLAGS AND PENNANTS PATTERNS:


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They represent brief pauses in Dynamic market

moves.

It is preceded by a sharp or straight line move

before its formation.

A Flag usually occurs after a sharp move andrepresent pause in the trend. The flag should

slope against the trend.

Volume should dry up on the formation andburst on the breakout.

A Flag generally occurs near the midpoint of a

move.



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Both patterns are relatively short term and

should be completed within 1 to 3 weeks.

It can also form on a down trend (Inverted flag

and pennant) signifying continuation of the

previous trend.

Both patterns occur about the midpoint of the

previous up move or down move signifying half

the previous way remaining from the breakout.

Both patterns take less time to form in a down

trend.



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A Pennant represents the formation of a

small symmetric triangle preceded by a

sharp up move.

Volume should be light on the formation

and burst on the breakout.

A Pennant is identified by 2 Converging

trend lines.

WEDGE FORMATION:


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WEDGE FORMATION:

A Wedge is similar to that of a symmetric

triangle both in terms of its shape and timeexcept for its slant.

A Wedge usually lasts more than 1 month but

not more than 3 months.

A Wedge has a noticeable slant either to the

upside or the downside which is opposite to

that of prior trend i.e. it slants against the

previous trend. (Like flag pattern)

A Wedge can either be a falling Wedge or a

raising Wedge.

WEDGE FORMATION:


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WEDGE FORMATION:

A Falling Wedge is considered to be bullish and a raising

wedge bearish.

Wedges often occur within the existing trend and are

usually continuation patterns. However appearance of

wedge at the top or bottom signifies reversal of the

trend.

A raising wedge at the end of a top is an early signal of

beginning of a down trend.

A falling wedge at the bottom signifies end of the bear

trend. Whether a Wedge appear at the middle or end of the

move, the general rule of raising wedge is a bearish

signal and a falling wedge is a bullish signal should be

kept in mind.

FALLING WEDGE (BULLISH)


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B

A

C

D

F

E

FALLING WEDGE (BULLISH):

G


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RAISING WEDGE (BEARISH):


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B

A

C

D

F

E

RAISING WEDGE (BEARISH):

RECTANGLE FORMATION:


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RECTANGLE FORMATION:

It is a continuation pattern, where price moves

sideways in between two parallel horizontal lines. Volume should be heavy on breakout.

Short term traders buy at the lower band of the

rectangle and sell at the higher end.

Similar to that of a channel line except the trend is

sideways.

Formation of a rectangle takes 1 to 3 months.

The height of the trading range can be used as a

measuring yard to fix price target from the breakout

point.

CONTINUATION H & S PATTERN:


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CONTINUATION H & S PATTERN:

If an Head and Shoulder pattern occurs on

a down trend or an Inverted Head and

Shoulder pattern on an uptrend, it is

considered to be a continuation pattern

instead of reversal pattern.

Prior trend before the formation of an

head and shoulder pattern identifies

whether it is a reversal or a continuationpattern.

VOLUME AND OPEN INTEREST:


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VOLUME AND OPEN INTEREST:

Among the 3 indicators used in technical analysis,

Price is always considered as the Primary indicator,whereas Volume and Open interest are considered

to be secondary indicators.

Volume is the number of entities traded or

exchanged hands in a particular time period.

Volumes are predominantly used in daily charts and

weekly charts, but are very rarely used in monthly

charts.

Volume precedes price and hence chartist consider

it as an early signal of future Price Movements.

OPEN INTEREST:


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OPEN INTEREST:

Open Interest refers to the total number of

outstanding or un liquidated contracts at theend of the day.

Open interest represents the total number of

Outstanding longs or shorts contracts and not

the total of the both.

One contract is represented by both buyer as

well as seller.


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OPEN INTEREST:


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OPEN INTEREST:

Thus if both participants in a trade are

initiating a new position, the Open Interest

will increase.

If both the participants are liquidating

their old positions, the Open Interest will

decline.

However if one is initiating a new position

and an other liquidating his old position,

there is no change in the open interest.

STUDY OF VOLUME AND OPEN INTEREST:


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STUDY OF VOLUME AND OPEN INTEREST:

PRICEPRICE VOLUMEVOLUME OPENOPEN

INTERESTINTEREST

MARKETMARKET

RISINGRISING UPUP UPUP STRONGSTRONG

RISINGRISING DOWNDOWN DOWNDOWN WEAKWEAK

DECLININGDECLINING UPUP UPUP WEAKWEAK

DECLININGDECLINING DOWNDOWN DOWNDOWN STRONGSTRONG

On Balance Volume (OBV):


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On Balance Volume (OBV):

Developed and Popularized by Joseph

Granville in 1963.

OBV is a curved line which confirms the

continuation of the previous trend or

warns the beginning of a reversal trend.

If Price and OBV lines converges, then it

is a bullish pattern and divergence of

these lines indicate reversal of the trend.


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MONEY FLOW INDEX:


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MONEY FLOW INDEX:

Developed and Popularized by Laszlo

Birinyi.

It is a minor variation over OBV where the

level of Volume on each price range is

determined to know the money flow into

and outside the stock.

If Price and MFI lines converges, then it is

a bullish pattern and divergence of these

lines indicate reversal of the trend.


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MONEY FLOW INDEX:


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MONEY FLOW INDEX:

Developed and Popularized by Laszlo Birinyi.

It is a minor variation over OBV where the

level of Volume on each price range is

determined to know the money flow into and

outside the stock.

If Price and MFI lines converges, then it is a

bullish pattern and divergence of these lines

indicate reversal of the trend.Calculation of Put - Call open interest ratio.

LONG TERM CHART ANALYSIS:


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On the Weekly and Monthly charts, each

bar represents one week and one monthsprice action respectively.

The purpose of weekly and monthly charts

is to compress the price action so as to

expand the time horizon and to look at the

bigger picture.

Followers of Random walk theory criticize

the use of short term charts, whereas the

long term charts are against the claim of

random walk.



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Interpretation of Price patterns on a Long term

chart is same as that of a daily chart.

The practical approach to study of charts at

different time periods should be from long term

charts to short term charts. (Zeroing down

Approach)

It is a policy of moving from Macro to Micro

approach or moving big to small picture.

Long term charts should not be used for timing

the market and for trading purposes.


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INDICATORSINDICATORS

ININCHART ANALYSISCHART ANALYSIS

1.1. OBV.OBV.


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2.2. MFI.MFI.

3.3. MOVING AVERAGE.MOVING AVERAGE.

4.4. BOLLINGER BAND

S.BOLLINGER BAND

S.5.5. 4 WEEK RULE.4 WEEK RULE.

6.6. OSCILLATORS.OSCILLATORS.

7.7. CCICCI

8.8. RSIRSI

9.9. STOCASTICSSTOCASTICS

10.10. MACDMACD

11.11. ACCUMULATIONACCUMULATION DISTRIBUTIONDISTRIBUTION

12.12. ATR.ATR.

13.13. WILLIAMS % R.WILLIAMS % R.

14.14. WILLIAMS A/DWILLIAMS A/D

15.15. CHAIKIN OSCILLATORSCHAIKIN OSCILLATORS


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MOVINGMOVING

AVERAGESAVERAGES

MOVING AVERAGES:


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It is a simple trend analysis technique

which averages out the prices for aparticular period of time.

In short it is a Curving Trend line which

helps in identifying the beginning of a newtrend line or end of a old trend line.

It is only an indicator tool and not a

leading tool. It only reacts and never

anticipates.

MOVING AVERAGES:


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Moving averages lag the market price

action and smoothens the noise in priceaction.

Shorter term Moving Averages are more

sensitive to price action in comparison tolonger duration moving averages.

Moving averages can be Simple or

Weighted or Exponential Moving

averages.

MOVING AVERAGES:


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When the Closing Prices move above the

Moving Average, a Buy signal is generated andif it moves below the moving average, a Sell

signal is generated.

A Shorter period Moving average gives an earlysignal in comparison to longer period average,

it also generates lots of noise and whipsaws.

The longer average works better when thetrend remains in motion and shorter averages

work better when the trend is reversing.

MOVING AVERAGES:


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Using 2 averages to generate signals is called

as Double Cross Over Technique.

A Buy Signal is generated when the Shorter one

crosses the longer one and vice-versa.

5 and 20days (Popular among future traders),10 and 50 days (Popular among stock traders)

moving averages are considered to be very

popular cross over periods.

The double cross over technique produces

lesser whipsaws in comparison to Single

moving averages.

MOVING AVERAGES:


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Using 3 averages to generate signals is called

as Triple Cross Over Technique.

4-9-18 days moving averages are considered

to be very popular Triple Cross over periods.

The shorter the moving average period, morecloser they move towards the price. Thus in an

uptrend, 4 day average should be higher than

9 day average, and 9 day higher than 18 day

average and vice-versa in a down trend.


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MOVING AVERAGES:


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A buy signal alert is given when in an

down trend, 4day crosses over 9day and itis confirmed when 9day crosses over

18days.

A Sell signal alert is given when in anUptrend, 4day crosses down wards over

9day and it is confirmed when 9day

crosses down wards over 18days.


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BOLLINGERBOLLINGER

BANDSBANDS

BOLLINGER BANDS:


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Developed by John Bollinger.

Using Standard deviation, Upper and Lower

bands are fixed above and below the moving

average.

Prices are said to be overextended if theytouch the upper band and are considered to be

oversold if they touch the lower band.

Generally they are plotted around a 20 daymoving average and standard deviation on the

either side covers at around 95% of the price

data.

BOLLINGER BANDS:


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It is also used on Weekly charts so as to predict

overbought and oversold situations.

The Upper band and the Lower band is used as Price

Targets on the either sides and the 20day moving

average as the neckline.

Bollinger band expands or contracts based on the last20days volatility of the script.

If the distance between the upper and lower band

narrows, it is an early signal of anticipated reversal in

trend.

Bollinger Bands are never to be studied in isolation,

instead to be studied along with other indicators.


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4 WEEK RULE4 WEEK RULE

4 Week Rule:


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It is used primarily for derivatives and

commodity markets.Cover Short positions and Buy long whenever

Prices exceed the highs of the 4 preceding

Calendar weeks.

Liquidate Long Positions and sell short

whenever the Prices fall below the 4 preceding

Calendar weeks.

According to this rule, the trader is always in the

market either Long or Short.

4 Week Rule:


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The above tool can be used without the aid of the

computer. It doesnt catch the market tops or bottoms.

Weekly breakouts can be used as confirming

signals for other technical indicators.(In particular for Moving averages)

The time period employed can be expanded or

contracted based on the sensitivity and risk

management levels.

1week or 2weeks low can be used as stop losses

to exit previous longs.


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OSCILLATORSOSCILLATORS

Oscillators:


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They are extremely useful in trend less markets

where other tools dont work. It helps the trader in recognizing the overbought

or over sold situation.

It also helps the trader in understanding the trendwhich is loosing momentum i.e. trend nearing

completion by displaying certain divergence.

Oscillator is only a secondary indicator which

may be a subordinate to basic trend analysis.

Oscillators are extremely useful towards the end

of a market move rather than at the beginning.

General Rules for Oscillators Interpretation:


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Oscillators generally trade within a horizontal range or

band and few oscillators also has a midpoint value, that

divides the horizontal range into 2 equal half's.

When oscillators reach an extreme range either on the

upper side or the lower side of the band, this suggests

that the current price move has gone too far and is due

for a correction.

The trader should buy when the Oscillator line is in the

lower end of the band and selling in the Upper end.

The crossing of the midpoint line is often used togenerate buy and sell signals.

Oscillators Use:


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Oscillator is most useful when its value reaches

an extreme reading on either side of the range. The market is said to be overbought when it is

near the upper extreme and over sold when it is

near the lower extreme.

A divergence between the Oscillator and the Price

when the Oscillator is in an extreme position is

very significant.

The crossing of the midpoint line can giveimportant trading signals in the direction of the

Price trend.

Oscillators and Momentum:


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The study ofmomentum is the basic study done

in Oscillator analysis.Momentum measures the VELOCITY of Price

change as opposed to actual price change.

Market momentum is measured by continually

taking the price differences for a fixed period of

time. (10days)

M = V Vx; where V is the latest closing price and

Vx is the closing price x days ago.

Oscillators:


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If the latest closing price is greater than that of

10days ago, a positive value above the Zero markis plotted and vice-versa.

A shorter period Oscillator is more sensitive to

that of a longer period one which is much

smoother.

Momentum measures the acceleration or

deceleration in the current advance or decline in

the price trend.

The Momentum line leads the price action and

gives an early signal for change in trend.

Oscillators:


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Crossing of Zero line is considered as a trading signal

where crossing above the zero line is a buy signal and

below the zero line is a sell signal.

Oscillators signals should not be used against the

basic price trend. i.e. buy positions should be initiated

on crossing above the zero line only if the markettrend is up and vice-versa.

Similarly Short positions should be initiated only if the

crossing below the zero line is complemented with a

basic down trend in prices.

AN OSCILLATOR IS A LEADING INDICATOR WHICH

TURNS EARLY TO THAT OF THE PRICE LINE.

Oscillators:


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The upper and lower boundary limits can be fixed

based on the previous momentum history.

There are 3 types of Oscillators:

1. Momentum Oscillators. (V-Vx)

2. Rate of change Oscillators. (V/Vx)3. Moving Average Oscillators. (Histogram)

COMMODITY CHANNEL INDEX:


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CCI technique was developed by DONALD

LAMBERT.While constructing CCI, current price is

compared with a moving average of selected

time period. (Usually 5,10,20 and 40days)

While CCI was originally developed for

Commodity trading, it is now a days popularly

used for stocks.

CCI is a simple tool which indicates over bought

or over sold market.

COMMODITY CHANNEL INDEX:


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CCI is used as a timing tool which is best

applied to securities that have cyclicalmovements.

CCI does not determine the length of the cycle,

whereas it used to determine when the cycle

begins or ends.

Reading over +100 is considered to be Over

bought market and below -100 are considered to

be Over sold market.

Study ofdivergence signal is also popular in

CCI.


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RELATIVERELATIVE

STRENGTHSTRENGTH

IND

EXIND

EX

RELATIVE STRENGTH INDEX:

RSI t h i d l d b J W ll Wild


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RSI technique was developed by J.Welles Wilder.

It is the most popular and trusted Oscillator toolused by most of the traders, which smoothens the

noise found in most of the other Oscillator tools.

RSI = 100 100 / (1+RS)

RS = Average of x days UP closeAverage of x days DOWN close

14days is popularly used for the calculation of RSI and

14weeks in case of a Weekly chart being used. However

variations of 14 days are also used. Shorter the time

period, more sensitive the oscillator becomes and wider

is its amplitude.


RSI k b t t th t i t f th b d


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RSI works best at the extreme points of the band.

5,7 and 9 days are used as variations of the shortertime period RSI and 21 or 28 days is used for the

longer time duration.

The 14 days RSI becomes Over bought above 70 and

oversold below 30.

The study of chart patterns are equally applicable to

even RSI as they are drawn to regular price charts.

RSI PRICE Divergence:

If prices are rising or flat and RSI is decreasing, look

for turn down in prices. If prices are declining or flat

and RSI is increasing, expect prices to move higher.


FAILURE SWINGS


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FAILURE SWINGS:

A Top failure swing occurs when the RSindex risesabove 70, declines to a lower level (fail point), raises

again from that level attempting to break the

previous high, but falls below the fall point, it is a

Bearish sign.

A Bottom failure swing occurs when the RSindex

falls below 30, recovers and again falls attempting to

break the previous low, but fails and breaks the Fall

point, it is a Bullish sign.

Negative Divergence:Negative Divergence:


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Over Bought and Over Sold Situation:Over Bought and Over Sold Situation:


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Top Failure Swing:Top Failure Swing:


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Bottom Failure Swing:Bottom Failure Swing:


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STOCHASTICSSTOCHASTICS

STOCHASTICS:


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It is based on the observation that as price

increases, closing price will be closer to dayshigh on an uptrend and on a downtrend, closing

price will be closer to days low.

%K line and %D line are the two lines used inStochastics.

Stochastic observes where the most recent

closing price is in relation to the price range for

a chosen time period. (14days is generally used)

STOCHASTICS:

%K 100[(C L ) / (H L )]


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%K = 100[(C Lx) / (Hx Lx)]

where:

C = Latest closing price.

Lx= Lowest close for the last X days.

Hx= Highest close for the last X days.

The above formula measures the % of closing price in

relation to the total price range for the selected time

period.%D is the 3 period moving average of the %K line. (FS)

3 period moving average of %D gives Slow

Stochastics

STOCHASTICS:


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Most traders use Slow Stochastic to avoid too

much noise and to have a smooth curve.

K line is the faster line and D line is the slower

line.

20% and 80% are considered to be the bands ofOver bought and Over sold areas (Dline).

Buy when the %K line rises above the %D line

and sell when the %K line falls below the %D

line.Crossovers above the upper band (80) and

below the lower band (20) are more powerful

than within the band.

STOCHASTICS:


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Failure swing applied in RSI can also be applied for

interpreting Stochastic. Negative Divergence between Stochastics and Price

can also be interpreted as done in case of RSI.

Weekly Stochastics is used to forecast the market

direction and daily Stochastics can be used for

timing the market.

Stochastics are also popularly used on intra day

charts for effective day trading. RSI and Stochastics both confirming a particular

signal is very strong.


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Negative Divergence:Negative Divergence:


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MOVING AVERAGEMOVING AVERAGECONVERGENCE ANDCONVERGENCE AND

DIVERGENCEDIVERGENCE(MACD)(MACD)

MACD:


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MACD was developed by Gerald Appel.

It combines Oscillator technique with that of

Dual Moving average cross over approach.

The faster line called the MACD line is the

difference between the 2 exponentiallysmoothed moving average of the closing prices

(Usually 12 and 26 days).

The slower line called the Signal line is usually a9 period exponentially smoothed average of

MACD line.

(12-26-9)

MACD:


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The crossing over of the faster MACD line above

the slower signal line is a BUY SIGNAL.

A crossing over of the faster line below the

slower line is a SELL SIGNAL.

MACD line resembles an OSCILLATOR byfluctuating between above and below zero line.

An overbought situation exists when the lines

are too far above the zero line and over soldsituation when the lines are too far below the

zero line.


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ACCUMULATIONACCUMULATION

--DISTRIBUTIONDISTRIBUTION

Accumulation-Distribution Pattern:


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It is a variation of On balancing Volume which

attempts to confirm changes in prices bycomparing the volumes associated with it.

It is a momentum indicator which associates

changes in Price and Volume.

The indicator is based on the premise that more

the volume that accompanies a price move,

more significant is the move.


{(C L) (H C)} * V l


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{(C - L) (H C)} * Volume

(H L)

Where:

C = Close.

L = Low.

H = High.

The nearer the close is to the highs of the day, more

volume is added to the cumulative total and vice-versa.

If the close is exactly between the days high and low,then nothing is added or deducted to the cumulative

total.


Wh it i b i l t d th A/D


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When security is being accumulated, the A/D

moves up and when the security is beingdistributed, the A/D moves downwards.

When a Negative Divergence occurs between

Price and A/D pattern, Price will usually change

to confirm the A/D.


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AVERAGEAVERAGE

TRUE RANGETRUE RANGE

AVERAGE TRUE RANGE:

It is a measure of Volatility introduced by Welles


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It is a measure of Volatility introduced by Welles

Welder. The True Range indicator is the greatest of the

following:

a) The distance between todays high and todays

low.

b) The distance between Yesterdays close to todays

high.

c) The distance between Yesterdays close to todayslow.

The Average True Range is the 14 day moving

average of the true ranges.

AVERAGE TRUE RANGE:

Hi h ATR l t k t b tt


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High ATR values suggests market bottoms

following a Panic selling. (BULLISH)

Low ATR values suggests long sideways period

and signals of market topping.

As prices bottom, Volatility is very high.

Low Volatility generally accompanies

consolidation phase before the prices break out.

Topping of ATR suggesting market bottomingTopping of ATR suggesting market bottoming


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WILLIAMS % RWILLIAMS % R

WILLIAMS %R:

It is a Momentum indicator introduced by Larry

Williams


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Williams.

%R = {Highest high in n periods Latest close} * - 100

{Highest high in n periods Lowest low in n periods}

The interpretation of Williams %R is very similar to

that of a Stochastic.

Reading over 80 or below 20 indicate the market

extremes of overbought or oversold situations.

It is wise to sell after price starts turning down, ratherthan simply selling because it is overbought. %R may

remain at overbought situations for an extended

period when price still continues its upward move.

WILLIAMS %R:

%R is a strong leading indicator which forms a peak


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%R is a strong leading indicator which forms a peak

and turns down a few day before the security pricepeaks and turns down.

Similarly %R usually creates a bottom and turns up

few days before the security price turns up.

William %R popularly uses 14 days time period.

5-10-20-28-56 are also popularly used as variations to

14 days time period.


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WILLIAMSWILLIAMS

ACCUMULATION ANDACCUMULATION ANDDISTRIBUTIONDISTRIBUTION

WILLIAMS ACCUMULATION-DISTRIBUTION:

Accumulation indicates market controlled by buyers


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and Distribution indicates markets controlled by

sellers.

How to Calculate?

STEP-1:

Determine True Range High and True Range Low i.e.

TRH and TRL.

TRH = Yesterdays close or todays high which

ever is Greater.

TRL = Yesterdays close or todays low which ever

is Lower.


STEP-2:


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1) If todays close is greater than yesterdays close:Todays W A/D = Todays close TRL.

2) If todays close is less than yesterdays close:

Todays W A/D = Todays close TRH.

3) If todays close is equal to yesterdays close:

Todays W A/D = 0

THE WILLIAMS ACCUMULATION-DISTRIBUTION IS THE

CUMULATIVE TOTAL OF THESE VALUES i.e. todays

A/D + (1) OR (2) OR 0 (3) Yesterdays cumulative A/D.


Distribution of security is indicated by


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Distribution of security is indicated by

security making a new high and the WilliamA/D indicator failing to make a new high.

{Bearish Signal} (Top Failure Swing)

Accumulation of security is indicated bysecurity making a new low and the William

A/D indicator failing to make a new low.

{Bullish Signal} (Bottom Failure Swing)

Bearish SignalBearish Signal


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CHAIKIN OSCILLATORCHAIKIN OSCILLATOR

CHAIKIN OSCILLATOR:

Inspired by the works of Joe Granville on OBV and

Williams on Accumulation and Distribution,


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Williams on Accumulation and Distribution,

Marc Chaikin developed a moving average oscillator. The Chaikin Oscillator is created by subtracting a 10

period exponential moving average of the

Accumulation Distribution line from a 3 period

exponential moving average of the accumulation distribution line.

If a stock closes above its midpoint (high + close) / 2

for the day, then there was an accumulation on that

particular day and if stock closes below its midpointfor the day, there was a distribution for that particular

day.

CHAIKIN OSCILLATOR:

Volume is considered as the fuel which powers a

healthy rally. Thus accumulation should be supported


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healthy rally. Thus accumulation should be supported

by heavy volumes and distribution by low volumes inan uptrend and vice-versa.

A Bearish divergence occurs when Prices move to

newer highs and the oscillator flattens or declines.

A Bullish divergence occurs when Prices decline and

creates a newer low and the oscillator flattens or

moves higher.

Bullish Divergence:Bullish Divergence:


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ELLIOTT THEORYELLIOTT THEORY

ELLIOTT THEORY:

Proposed by Ralph Nelson Elliott, Wave theory was

improvised by Charles J Collins.


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improvised by Charles J Collins.

Elliot was very much influenced by the Dow theory.

Through constant observations and nature of markets,

Elliott concluded that the movements of stocks can be

predicted by observing repetitive patterns of waves.

There are 3 basic tenants of Elliott wave theory:

a) Pattern.

b)Ratio.c) Time.

ELLIOTT THEORY:

Patterns represents the Wave Formation that

comprises the most important element of the theory.


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p p y

Ratios determine the Retracement Points and thePrice Objectives by measuring the relationship

between different waves.

Time relationships even though considered less

significant are used to confirm the Patterns and

Ratios.

In its most basic form, the theory says that the stock

market follows a repetitive rhythm of a 5 Waveadvance followed by a 3 Wave decline.

One complete cycle has 8 Waves of which 5 are

advancing and 3 declining.

ELLIOTT THEORY:

Waves 1, 3 and 5 are called Rising or Impulsive Waves

and Waves 2 and 4 are called Declining Waves.


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g

After the 5 Wave advance, the 3 Wave Correctionbegins. (represented by a, b, c)

The Basic Pattern:

0-1 is called Wave 1, (Impulsive Wave)

1-2 is called Wave 2, (Declining Wave)


3-4 is called Wave 4, (Declining Wave)


5-a is Wave a, a-b is Wave b, and b-c is Wave c.

THE BASIC PATTERN:


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a1

3

2

4

5

b

c

0

ELLIOTT THEORY:

Each larger Wave can be further sub-divided into smaller

waves which follows the Fibonacci series.


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The Fibonacci series 1,2,3,5,8,13,21,34,55,89,144,.. Whether a given wave is divided into 5 or 3 is determined

by the direction of the next larger wave.

Declining Waves moving against the trend (2 and 4) are

subdivided only into 3 waves whereas the corrective wavesa and c are subdivided into 5 waves.

Corrective waves (a) and (C) are moving in the same

direction as the next larger wave 2, and hence are

breakdown into 5 waves, whereas Wave (b) by comparisonhas only 3 waves since it is moving against the next larger

wave 2.


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ELLIOTT THEORY:

It is of great importance to determine the difference

between groups of 3 and 5 waves, in application of


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g p pp

Elliott Theory to forecast the future. A completed 5 wave move is only a completion of one

of the parts of larger wave and there is more upside

left unless it is 5th of 5th larger wave.

A Correction can never take place in 5 Waves, it is

always of 3 Waves.

In a Bull Market if a 5 wave decline is seen, it may

probably be the 1st

wave of the 3 Wave (a,b,c) declineand there may be more declines to come in future.

In a Bear Market a 3 wave advance should be followed

by resumption of a downtrend.

ELLIOTT THEORY:

Corrective Waves are less clearly defined and are very

difficult to identify / predict.


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y p

Corrective Waves are always of 3 Waves and it cannever take place in 5 Waves. (With an exception of

Triangle)

Corrective Waves are classified into 3types:

1. Zig-Zags.

2. Flats.

3. Triangles.

ELLIOTT THEORY:

ZIG ZAGS:

A Zig Zag is a 3 Wave Corrective Pattern against the


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A Zig Zag is a 3 Wave Corrective Pattern against the

major trend which breaks down into a 5-3-5 sequence.

Middle Wave B, falls short of the beginning of Wave A

and Wave C moves well beyond the end of Wave A.

Bull Market Zig Zag (5-3-5)

ELLIOTT THEORY:

ZIG ZAGS:

Bear Market Zig Zag (5 3 5)


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Bear Market Zig Zag (5-3-5)

ELLIOTT THEORY:

ZIG ZAGS:

Double Zig Zag (5-3-5 (3) 5-3-5)


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Double Zig Zag (5-3-5 (3) 5-3-5)

It is a less common variation of Zig Zag which sometime

Occur in big corrective patterns. It is nothing but 2 Zig

Zag pattern (5-3-5) connected by an intervening a-b-c

Pattern.

ELLIOTT THEORY:

FLATS:

A Flat Pattern follows a 3-3-5 Pattern Wave a is a 3


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A Flat Pattern follows a 3-3-5 Pattern. Wave a is a 3

pattern wave unlike 5 incase of Zig-Zag.

Flat is more of a consolidation phase rather than

correction phase. It is a sign of strength in a Bull

Market.

BULL MARKET FLAT: (3-3-5) Normal Correction.

ELLIOTT THEORY:

FLATS:

BEAR MARKET FLAT: (3-3-5) Normal Correction


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BEAR MARKET FLAT: (3 3 5) Normal Correction.

ELLIOTT THEORY:

TRIANGLES: (3-3-3-3-3)

Triangles usually occur in the fourth wave and


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Triangles usually occur in the fourth wave and

precede the final move in the direction of the majortrend.

They can also appear in wave b in a,b,c correction.

Triangles are both Bullish and Bearish in an uptrendsince they indicate resumption of an uptrend and also

indicate that after an another wave up, prices will

correct.

Corrective waves in case of a triangle may be of 5waves, unlike Zig-Zag and Flats which are of 3 waves.


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ELLIOTT THEORY:

TRIANGLES:

Triangles are usually continuation pattern that break


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g y p

downs into patterns of 5 waves, each wave having 3 wavesof its own.

According to Elliot, there are 4 types of triangles namely:

a) Ascending Triangles.

b) Descending Triangles.

c) Symmetric Triangles.

d) Expanding Triangles. (Broadening Pattern)

Price Objective incase of triangles is measured based on

the height of the triangle formed from the base.

ELLIOTT THEORY:

The rule of Channel lines studied earlier helps in

id tif i th t t th i t f b h f


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identifying the wave counts at the point of breach of

channel line.

Wave 4 in a previous bull market shall be considered

as the strong support area in subsequent bear

markets. After the end of Bull market with 5 up waves and

beginning of Bear market, the markets generally will

not move below the 4th wave of the previous up move.

It helps to identify the bottom of the bear market.

ELLIOTT THEORY:

Fibonacci Numbers for Ratios:


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The following series of Fibonacci numbers1,2,3,5,8,13,21,34,55,89,144 as the following

salient features:

a) The sum of any 2 consecutive numbers equals the

next highest number.

b) The ratio of any number to its next higher number

approximates to 0.618.

c) The ratio of any number to its next lowest numberapproximates to 1.618.

d) The ratio of alternate number approaches to 2.618 or

its inverse 0.382.


One of the Impulsive waves sometimes extend and the

other two waves are equal in magnitude and time i e


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other two waves are equal in magnitude and time. i.e.

if wave 5 extends, wave 1 and 3 should be about equaland if wave 3 extends, wave 1 and 5 should be about

equal.

A Minimum target for top of Wave 3 can be obtained

by multiplying the length of wave 1 by 1.618 to the

bottom of Wave 2.

The Top of Wave 5 can be approximated by multiplying

Wave 1 by 3.236 (2 * 1.618) and adding that value tothe top or bottom of wave 1 to obtain maximum and

minimum targets.


Where Wave 1 and 3 are of about equal, and Wave 5 is

expected to extend, Price Objective for Wave 5 is the


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p j

distance between the bottom of wave 1 to top of wave 3,multiplied by 1.618 from bottom of wave 4.

For Corrective Waves, in a normal 5-3-5 Zig-Zag correction,

Wave C is often about equal to the length of Wave A or

multiply 0.618 by the length of Wave A and subtract thatresult from bottom of Wave A to get the possible length of

wave C.

Incase of flat 3-3-5 correction, where Wave B reaches or

exceeds the top of Wave A, Wave C will be about 1.618 thelength of Wave A.

In a symmetric triangle, each Wave is to its previous wave

by about 0.618.

Fibonacci Percentage Retracements:

The most commonly used percentage


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y p g

retracements are 61.8%, 38% and 50%.

In a strong trend, a minimum retracement is

usually around 38% and in a weak trend, the

maximum retracement is around 62%.

(Retracements are measured from bottom of an

uptrend to the top of an uptrend and vice-versa)

Fibonacci Time Targets:

It is considered to be least important of the three being Price,

Ratios and time.


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It is very difficult to predict and since it is least important, manyfollowers of Elliot ignore it.

Fibonacci time targets are found by counting forward from

significant tops or bottoms.

Trader counts from the top or bottom the number of tradingdays for future top or bottom to occur on Fibonacci days i.e.

13,21,34,55 or 89th trading day.

The above time targets are used on all types of charts namely

Daily, Weekly and monthly charts.

Fibonacci time targets can be taken from top to top, top to

bottom, bottom to top and bottom to bottom. But however the

above targets can be found only after the fact.

Elliot Wave Summary:

A complete Bull Market cycle is made up of 8 Waves, 5 Up

Waves followed by 3 Down Waves.


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Waves can be expanded into longer waves and sub-dividedinto shorter waves.

Correction always takes place in 3 Waves.

The 2 types of Corrections are Zig-Zag (5-3-5) and Flats (3-3-

5).

Triangles are usually 4th Wave or Wave B.

Sometimes one of the impulsive waves extend and the other

two will be of time and magnitude.

The number of Waves follow the Fibonacci sequence.

Fibonacci ratios and retracements are used to find out Price

Objectives.

Elliot Wave Summary:

The most common retracements are 38%, 50% and 62%.

Bear markets should not fall below the bottom of the


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Bear markets should not fall below the bottom of the

previous 4th Wave.

The theory was originally applied to Stock Market

averages and does not work as well incase of individual

stocks.

Elliot works very well in case of those markets which are

highly liquid and followed by large number of investors

and traders.

Elliot theory should be used in conjunction with othertechnical indicators and not against them.


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CANDLE STICKSCANDLE STICKS

BAR CHARTS VS CANDLE STICKS


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Candle charts pictorially displays the Supply andDemand function by showing who is winning the

battle between Bulls and Bears.

Candle Sticks not only reveal the trend but also

the force or lack of force behind the trend.

Candle Stick charts indicate early signals of

reversal in comparison to that of Bar Charts.

It can be used on all markets and all assets withOpen, High, Close and Low data.

BAR CHARTS VS CANDLE STICKS


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Studies market psychology much fasterand easier than bar charts. A candles

extended real body demonstrate definite

bullishness or bearishness. However asmall real body indicates indecision or a

tug of war between the bulls and the bears

with no definite winner.

INTRODUCTION


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Candle Sticks predict the strong psychologyof the markets, its emotions and future

expectations.

What is important in market fluctuations

are not the events themselves, but the

HUMAN REACTIONS to these events.

INTRODUCTION


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The use of Candle Stick charts originated inJAPAN when RICE was the medium of

exchange.

Munehisa Homma is considered as thefather of Candle Sticks.

NEVER PLACE A TRADE WITH A

CAND

LE SIGNAL WITHOUTCONSIDERING THE RISK-REWARD

RATIO OF THE POTENT TRADE

LIMITATIONS


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They need a Close to confirm the CandleSignal.

They dont give PRICE TARGETS.

Candle Patterns cannot be used in isolationto effect trades.

Cannot be used on tick charts.

DEFINTIONS

REAL BODY:


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REAL BODY:

It is the rectangle portion of the Candle that

represents the range between the Opening

and Closing Price.

WHITE (GREEN) REAL BODY:

It represents Close being higher than Open.

BLACK (RED) REAL BODY:

It represents Close being lower than Open.

DEFINTIONS

SHADOW:


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SHADOW:

It is the Vertical line that extends above and

below the real body called as Upper and

Lower Shadows.

The Top of the Upper shadow is the

sessions high and the Bottom being the

sessions low.

DEFINTIONS SHAVEN HEAD AND BOTTOM:


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If the Close is at the Highs of the session, it hasno upper shadow and hence it has a ShavenHead.

If the Close is at the Lows of the session, it has

no lower shadow and hence it has a ShavenBottom.

The top of the upper shadow and the bottom ofthe lower shadow represents the highs and lows

of the session, whether the real body is White(Green) or Black (Red).

TIME FRAME Like BARS, each CANDLE represents


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Like BARS, each CANDLE representsaction for a specific time frame. On a dailychart, each candle represents price actionfor a day, on a weekly chart for a week andon a 15 minute intra day chart, a 15 minuteunit of time.

A Long body (either Green or Red) indicatestrong market participation, whereas a

Small body indicates no marketparticipation.

SIGNALS

EXAMPLE OF A CANDLE


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EXAMPLE OF A CANDLE

A Long Green real body indicate, extremely

POSITIVE or BULLISH sentiments as the

close is many points above its open and

near to its day high.

A Long Red real body indicate, extremely

NEGATIVE or BEARISH sentiments as the

close is many points below its open andnear to its day low.

SIGNALS

The upper shadow indicates that the


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The upper shadow indicates that the

days high could not be maintained by

the Bulls because of selling pressure at

higher levels or lack of buying interest at

higher levels. The lower shadow indicates that the

Buying came at lower levels to support

the stock price not to go further below.

SIGNALS


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They believe that the firsthour of the day sets the

tone of the days market.

It is said that the amateur

opens the market and the

professional closes it.


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MARKET STRATEGIES

MARKET STRATEGIES

Trend change or Reversal signal


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g g

represents the transformation in market

psychology and an investor should trade

accordingly.

As the popular saying, TREND IS YOURFRIEND AND ALWAYS GO ALONG WITH

IT.

On Charts, Western trend reversal patterns

include Double tops/bottoms, Triple

tops/bottoms, Head and Shoulder, Island

tops and bottoms, Cup and Saucers etc.

MARKET STRATEGIES

A Reversal signal should be used to


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A Reversal signal should be used to

initiate a new position only if that signal

is in the direction of the major trend.

Consider a Stock moving in a strong

uptrend, and then it either consolidatessideways or moves downwards to

retracement levels, and at this time if a

BULLISH CANDLE signal appears, freshLong Positions can be initiated.

MARKET STRATEGIES

A Bullish Candle signal in a bear trend


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g

should be used to either cover short or

as an alert that the markets may rally

and to use that rally to sell since the

major trend is down. A trend reversal signal may indicate

continuation of the previous trend or

reversal of the previous trend.

TREND REVERSALS


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In figure 1, trend resumes afterretracement, whereas in figure 2, trend

breaks down.

FIGURE 1 FIGURE 2

SUPPORTS AND RESISTANCES

Identification of Support and Resistance


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pp

levels are very important.

It may be a Prior high or low, trend line,Moving average or most recent high or

low. If a Bullish Candle appears at the

Support, it increases the potential of theuptrend to resume, whereas a Bearish

candle at the Resistance increases thepotential for the downtrend to begin.

SUPPORTS AND RESISTANCES

The Previous Supports may now act as


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y

New Resistances and PreviousResistance now as New Support.

A break of Support or Resistance on a

Closing Basis is considered moreimportant than on an Intra day basis.

A sideways trend in Japaneseterminology is called as BOX Range.

Close of real body above or below therange is of vital importance.


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STUDY OF SINGLE CANDLES SPINNING TOPS:


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It refers to a Candle (either Green or Red) with

a Small Real Body. Spinning Tops may have

Upper and Lower Shadows or none at all.

A Spinning Top indicate that Bulls and Bearsare battling it out in a tug of war with neither

the bulls nor bears being able to take

dominant control.

Spinning top helps a trader to cover oldpositions and not to initiate new positions.

STUDY OF SINGLE CANDLES


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SPINNING TOPS:

STUDY OF SINGLE CANDLES HIGH WAVE CANDLES:


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They also have diminutive real body(either green or red) like spinning topbut also longer upper and lower

shadows. The Upper and Lowershadows need not be of same size, butshould be substantially long.

High wave candles indicate outright

CONFUSION in the minds of bulls andbears.

STUDY OF SINGLE CANDLES


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HIGH WAVE CANDLES:

TREND ANALYSIS THRU SPINNING

TOPS AND HIGH WAVE CANDLES


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UPTREND:

In an Uptrend supported by long green real

body, small real body (either green or red)

exerts caution on the long side. Spinning tops are warnings not to follow this

market on the long side and are more powerful

in a market which are becoming over extended

and are nearing resistance levels. A trend shiftor reversal may be in the offering.




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SIDEWAYS TREND:

In a Sideways trend or a Box Range,

Spinning Tops and High Wave candles

have no implications of trend reversal orshift. It indicates markets simply resting

before it breaks up or down from the

price range.




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DOWN TREND:

In an Down trend supported by long red real

body, small real body (either green or red)

exerts caution on the short side. Spinning tops are warnings not to follow this

market on the short side and are more

powerful in a market which are becoming over

sold and are nearing Support levels. A trendshift or reversal may be in the offering.


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HAMMER AND HANGING MAN The Hammer and Hanging man candles


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have small real body (whether green or red)and should have long single sided shadow.

An HAMMER appears on a down trend at ornear the bottom which suggests that the

market is hammering out a base.

An HANGING MAN appears on an uptrendat or near the top which suggests that themarket is creating a top. One must wait fora close under the Hanging mans real bodybefore becoming BEARISH.


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SHOOTING STAR A Shooting Star is a top reversal line just like


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the Hanging man. A Shooting Star displays along upper shadow and its small real body is at

or near the lows of the session.

A Shooting Star shows trouble overhead.

Because of the Shooting Stars long bearish

upper shadow, we dont need any confirmation

like the Hanging man.

A Shooting Star is a bearish reversal signal andit must appear during a rally (Uptrend).

HAMMER, HANGING MAN AND

SHOOTING STAR


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EASY INTERPRETATION

S


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FEEL BULLISH WITH AHAMMER AFTER A FALLING

MARKET AND BEARISH

AFTER A RISING MARKET.

THE DANGEROUS DOJI

The D

Pavan technicals

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