Report on fundamental and technical analysis

7/31/2019 Report on fundamental and technical analysis

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Introduction

Stock market is an important part of the economy of a country. The stock market plays a play a

pivotal role in the growth of the industry and commerce of the country that eventually affects the

economy of the country to a great extent. That is reason that the government, industry and even

the central banks of the country keep a close watch on the happenings of the stock market. Thestock market is important from both the industrys point of view as well as the investors point of

view.

Whenever a company wants to raise funds for further expansion or settling up a new business

venture, they have to either take a loan from a financial organization or they have to issue shares

through the stock market. In fact the stock market is the primary source for any company to raise

funds for business expansions. If a company wants to raise some capital for the business it can

issue shares of the company that is basically part ownership of the company. To issue shares for

the investors to invest in the stocks a company needs to get listed to a stocks exchange and

through the primary market of the stock exchange they can issue the shares and get the funds forbusiness requirements. There are certain rules and regulations for getting listed at a stock

exchange and they need to fulfill some criteria to issue stocks and go public. The stock market is

primarily the place where these companies get listed to issue the shares and raise the fund. In

case of an already listed public company, they issue more shares to the market for collecting

more funds for business expansion. For the companies which are going public for the first time,

they need to start with the Initial Public Offering or the IPO. In both the cases these companies

have to go through the stock market.

This is the primary function of the stock exchange and thus they play the most important role of

supporting the growth of the industry and commerce in the country. That is the reason that arising stock market is the sign of a developing industrial sector and a growing economy of the

country. Of course this is just the primary function of the stock market and just an half of the role

that the stock market plays. The secondary function of the stock market is that the market plays

the role of a common platform for the buyers and sellers of these stocks that are listed at the

stock market. It is the secondary market of the stock exchange where retail investors and

institutional investors buy and sell the stocks. In fact it is these stock market traders who raise the

fund for the businesses by investing in the stocks.

For investing in the stocks or to trade in the stock the investors have to go through the brokers of

the stock market. Brokers actually execute the buy and sell orders of the investors and settle thedeals to keep the stock trading alive. The brokers basically act as a middle man between the

buyers and sellers. Once the buyer places a buy order in the stock market the brokers finds a

seller of the stock and thus the deal is closed. All these take place at the stock market and it is the

demand and supply of the stock of a company that determines the price of the stock of that

particular company. So the stock market is not only providing the much required funds for

boosting the business, but also providing a common place for stock trading. It is the stock market


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that makes the stocks a liquid asset unlike the real estate investment. It is the stock market that

makes it possible to sell the stocks at any point of time and get back the investment along with

the profit. This makes the stocks much more liquid in nature and thereby attracting investors to

invest in the stock market.

With plummeting share prices making headline news, it is worth considering the impact of thestock market on the economy. How much should we worry when share prices fall? How does it

impact on the average consumer? and how does it affect the economy?

Indian Economy and its impact on stock market

Indian economy is the third largest economy in the world in terms of purchasing power. It is

going to touch new heights in coming years. As predicted by Goldman Sachs, the Global

Investment Bank, by 2035 India would be the third largest economy of the world just after US

and China. It will grow to 60% of size of the US economy. This booming economy of today has

to pass through many phases before it can achieve the current milestone of 9% GDP. If you wishto go for investing in the stock market you need to get some stock tips.

The economic history of India since Indus Valley Civilization to 1700 AD can be said under pre-

colonial phase. During Indus Valley Civilization the economy was very well developed. It had

very good trade relations with other parts of world, which is evident from the coins of various

civilizations found at the site of Indus valley. Then came the phase of Colonization. The arrival

of East India Company in India ruined the economy of India. There was a two-way depletion of

resources. British used to buy raw materials from India at cheaper rates and finished goods were

sold at higher than normal price in Indian markets. During this phase India's share of world

income declined from 22.3% in 1700 AD to 3.8% in 1952. After India got independence fromthis colonial rule in 1947, the process of rebuilding the economy started. For this various policies

and schemes were formulated. First five year plan for the development of the economy came into

implementation in 1952. These Five Year Plans, started by Indian government, focused on the

needs of the economy. Trade liberalization, financial liberalization, tax reforms and opening up

to foreign investments were some of the important steps which also include share market, which

helped the economy to gain momentum. The Economic Liberalization introduced by Man

Mohan Singh in 1991, then Finance Minister in the government of P V Narsimha Rao, proved to

be the stepping-stone for Indian economic reform movements.

To maintain its current status and to achieve the target GDP of 10% for financial year 2006-07,

the economy of India has to overcome many challenges.


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Challenges before Indian economy:

Population explosion: This monster is eating up into the success of India.According to 2001 census of India, population of India in 2001 was1,028,610,328, growing at a rate of 2.11% approx. Such a vast population puts

lots of stress on economic infrastructure of the nation. Thus India has to control

its burgeoning population.

Poverty: As per records of National Planning Commission, 36% of the Indianpopulation was living Below Poverty Line in 1993-94. Though this figure has

decreased in recent times but some major steps are needed to be taken to

eliminate poverty from India.

Unemployment: The increasing population is pressing hard on economicresources as well as job opportunities. Indian government has started various

schemes such as Jawahar Rozgar Yojna, and Self Employment Scheme forEducated Unemployed Youth (SEEUY). But these are proving to be a drop in an

ocean.

Rural urban divide: It is said that India lies in villages, even today when there islots of talk going about migration to cities, 70% of the Indian population still

lives in villages. There is a very stark difference in pace of rural and urban

growth. Unless there isn't a balanced development the economy cannot grow.

These challenges can be overcome by the sustained and planned economic reforms.

These include:

Maintaining fiscal discipline Orientation of public expenditure towards sectors in which India is faring badly

such as health and education.

Introduction of reforms in labour laws to generate more employmentopportunities for the growing population of India.

Reorganization of agricultural sector, introduction of new technology, reducingagriculture's dependence on monsoon by developing means of irrigation.

Introduction of financial reforms including privatization of some public sectorbanks.


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This booming Indian economy of today has to pass through many phases before it can achieve

the current milestone. It is very important to overcome and to face the challenges in front of the

economy of India in a more efficient and effective way to achieve productive, fruitful and

desired results on a continuous basis.

Economic Effects of Stock Market

1. Wealth Effect

The first impact is that people with shares will see a fall in their wealth. If the fall is significant it

will affect their financial outlook. If they are losing money on shares they will be more hesitant

to spend money; this can contribute to a fall in consumer spending. However, the effect should

not be given too much importance. Often people who buy shares are prepared to lose money;their spending patterns are usually independent of share prices, especially for short term losses.

2. Effect on Pensions

Anybody with a private pension or investment trust will be affected by the stock market, at least

indirectly. Pension funds invest a significant part of their funds on the stock market. Therefore, if

there is a serious fall in share prices, it reduces the value of pension funds. This means that future

pension payouts will be lower. If share prices fall too much, pension funds can struggle to meet

their promises. The important thing is the long term movements in the share prices. If share

prices fall for a long time then it will definitely affect pension funds and future payouts.

3. Confidence

Often share price movements are reflections of what is happening in the economy. E.g. recent

falls are based on fears of a US recession and global slowdown. However, the stock market itself

can affect consumer confidence. Bad headlines of falling share prices are another factor which

discourage people from spending. On its own it may not have much effect, but combined with

falling house prices, share prices can be a discouraging factor.

4. Investment

Falling share prices can hamper firms ability to raise finance on the stock market. Firms who are

expanding and wish to borrow often do so by issuing more shares it provides a low cost way of

borrowing more money. However, with falling share prices it becomes much more difficult.

As I said earlier there is an oft repeated quote saying the stock market has predicted 10 out of the

last 3 recessions. The point is that falling stock markets do not necessarily predict the economic

future. Share prices can fall without causing a downturn in the economy. For example, one thinks


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of the stock market crashes of October 1987; there wasnt an obvious economic factor causing

this share price fall. The major economies remained relatively unaffected by this stock market

crash. In fact, the UK had record growth in the late 1980s. This time the stock market fall is due

to economic weaknesses so is a better guide to future economic performance.

5. Bond Market

A fall in the stock market makes other investments more attractive. People may move out of

shares and into government bonds or gold. These investments offer a better return in times of

uncertainty. Though sometimes the stock market could be falling over concerns in government

bond market.

The Link between the Economy and the Stock Market

The primary link between the stock market and the economy in the aggregate is that an

increase in money and credit pushes up both GDP and the stock market simultaneously.

A progressing economy is one in which more goods are being produced over time. It is real

"stuff," not money per se, which represents real wealth. The more cars, refrigerators, food,

clothes, medicines, and hammocks we have, the better off our lives. We saw above that, if goods

are produced at a faster rate than money, prices will fall. With a constant supply of money,

wages would remain the same while prices fell, because the supply of goods would increase

while the supply of workers would not. But even when prices rise due to money being created

faster than goods, prices still fall in real terms, because wages rise faster than prices. In either

scenario, if productivity and output are increasing, goods get cheaper in real terms.

Obviously, then, a growing economy consists of prices falling, not rising. No matter how manygoods are produced, if the quantity of money remains constant, the only money that can be spent

in an economy is the particular amount of money existing in it (and velocity, or the number of

times each dollar is spent, could not change very much if the money supply remained

unchanged).

This alone reveals that GDP does not necessarily tell us much about the number of actual goods

and services being produced; it only tells us that if (even real) GDP is rising, the money supply

must be increasing, since a rise in GDP is mathematically possible only if the money price of

individual goods produced is increasing to some degree. Otherwise, with a constant supply of

money and spending, the total amount of money companies earnthe total selling prices of allgoods producedand thus GDP itself would all necessarily remain constant year after year.

"Consider that if our rate of inflation were high enough, used cars would rise in price just like

new cars, only at a slower rate."

The same concept would apply to the stock market: if there were a constant amount of money in

the economy, the sum total of all shares of all stocks taken together (or a stock index) could not


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increase. Plus, if company profits, in the aggregate, were not increasing, there would be no

aggregate increase in earnings per share to be imputed into stock prices.

In an economy where the quantity of money was static, the levels of stock indexes, year by year,

would stay approximately even, or drift slightly lowerdepending on the rate of increase in the

number of new shares issued. And, overall, businesses (in the aggregate) would be selling agreater volume of goods at lower prices, and total revenues would remain the same. In the same

way, businesses, overall, would purchase more goods at lower prices each year, keeping the

spread between costs and revenues about the same, which would keep aggregate profits about the

same.

Under these circumstances, capital gains (the profiting from the buying low and selling high of

assets) could be made only by stock picking by investing in companies that are expanding

market share, bringing to market new products, etc., thus truly gaining proportionately more

revenues and profits at the expense of those companies that are less innovative and efficient.

The stock prices of the gaining companies would rise while others fell. Since the average stock

would not actually increase in value, most of the gains made by investors from stocks would be

in the form of dividend payments. By contrast, in our world today, most stocks good and bad

ones rise during inflationary bull markets and decline during bear markets. The good

companies simply rise faster than the bad.

Similarly, housing prices under static money would actually fall slowlyunless their value was

significantly increased by renovations and remodeling. Older houses would sell for much less

than newer houses. To put this in perspective, consider that if our rate of inflation were high

enough, used cars would rise in price just like new cars, only at a slower rate but just abouteverything would increase in price, as it does in countries with hyperinflation The amount by

which a home "increases in value" over 30 years really just represents the amount of purchasing

power that the dollars we hold have lost: while the dollars lost purchasing power, the house

and other assets more limited in supply growthkept its purchasing power.

Since we have seen that neither the stock market nor GDP can rise on a sustained basis without

more money pushing them higher, we can now clearly understand that an improving economy

neither consists of an increasing GDP nor does it cause the overall stock market to rise.

This is not to say that a link does not exist between the money that companies earn and their

value on the stock exchange in our inflationary world today, but that the parameters of that link

valuation relationships such as earnings ratios and stock-market capitalization as a percent of

GDPare rather flexible, and as we will see below, change over time. Money sometimes flows

more into stocks and at other times more into the underlying companies, changing the balance of

the valuation relationships.


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Introduction to Technical Analysis and Fundamental Analysis.

Technical analysis and fundamental analysis are merely two different analysis methods. In a

nutshell, technical analysis looks at price actions and indicators, and uses this data to predict

future price movements. Fundamental analysis, however, looks at economic factors, business

fundamentals, stock price vs. value, etc.

Fundamental Analysis

Fundamental analysis is a method used to determine the value of a stock by analyzing the

financial data that is 'fundamental' to the company. That means that fundamental analysis takes

into consideration only those variables that are directly related to the company itself, such as its

earnings, its dividends, and its sales. Fundamental analysis does not look at the overall state of

the market nor does it include behavioral variables in its methodology. It focuses exclusively on

the company's business in order to determine whether or not the stock should be bought or sold.

Critics of fundamental analysis often charge that the practice is either irrelevant or that it is

inherently flawed. The first group, made up largely of proponents of the efficient market

hypothesis, say that fundamental analysis is a useless practice since a stock's price will always

already take into account the company's financial data. In other words, they argue that it is

impossible to learn anything new about a company by analyzing its fundamentals that the market

as a whole does not already know, since everyone has access to the same financial information.

The other major argument against fundamental analysis is more practical than theoretical. These

critics charge that fundamental analysis is too unscientific a process, and that it's difficult to get a

clear picture of a company's value when there are so many qualitative factors such as a

company's management and its competitive landscape.

However, such critics are in the minority. Most individual investors and investment professionals

believe that fundamental analysis is useful, either alone or in combination with other techniques.

If you decide that fundamental analysis is the method for you, you'll find that a company's

financial statements (its income statement, its balance sheet and its cash flow statement) will be

indispensable resources for your analysis. And even if you're not totally sold on the idea of

fundamental analysis, it's probably a good idea for you to familiarize yourself with some of the

valuation measures it uses since they are often talked about in other types of stock valuation

techniques as well.

Earnings

It is often said that earnings are the "bottom line" when it comes to valuing a company's stock,

and indeed fundamental analysis places much emphasis upon a company's earnings. Simply put,

earnings are how much profit (or loss) a company has made after subtracting expenses. During a

specific period of time, all public companies are required to report their earnings on a quarterly

basis through a 10-Q Report . Earnings are important to investors because they give an indication


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of the company's expected dividends and its potential for growth and capital appreciation. That

does not necessarily mean, however, that low or negative earnings always indicate a bad stock;

for example, many young companies report negative earnings as they attempt to grow quickly

enough to capture a new market, at which point they'll be even more profitable than they

otherwise might have been. The key is to look at the data underlying a company's earnings on its

financial statements and to use the following profitability ratios to determine whether or not the

stock is a sound investment .

Fundamental Analysis Tools

Earnings Per Share

Comparing total net earnings for various companies is usually not a good idea, since net earnings

numbers don't take into account how many shares of stock are outstanding (in other words, they

don't take into account how many owners you have to divide the earnings among). In order to

make earnings comparisons more useful across companies, fundamental analysts instead look ata company's earnings per share (EPS). EPS is calculated by taking a company's net earnings and

dividing by the number of outstanding shares of stock the company has. For example, if a

company reports $10 million in net earnings for the previous year and has 5 million shares of

stock outstanding, then that company has an EPS of $2 per share. EPS can be calculated for the

previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year

("forward EPS"). Note that last year's EPS would be actual, while current year and forward year

EPS would be estimates.

P/E Ratio

EPS is a great way to compare earnings across companies, but it doesn't tell you anything about

how the market values the stock. That's why fundamental analysts use the price-to-earnings ratio,

more commonly known as the P/E ratio, to figure out how much the market is willing to pay for

a company's earnings. You can calculate a stock's P/E ratio by taking its price per share and

dividing by its EPS. For instance, if a stock is priced at $50 per share and it has an EPS of $5 per

share, then it has a P/E ratio of 10. (Or equivalently, you could calculate the P/E ratio by dividing

the company's total market cap by the company's total earnings; this would result in the same

number.) P/E can be calculated for the previous year ("trailing P/E"), for the current year

("current P/E"), or for the coming year ("forward P/E"). The higher the P/E, the more the market

is willing to pay for each dollar of annual earnings. Note that last year's P/E would be actual,while current year and forward year P/E would be estimates, but in each case, the "P" in the

equation is the current price. Companies that are not currently profitable (that is, ones which

have negative earnings) don't have a P/E ratio at all. For those companies you may want to

calculate the price-to-sales ratio (PSR) instead

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Projected Earnings Growth

So is a stock with a high P/E ratio always overvalued? Not necessarily. The stock could have a

high P/E ratio because investors are convinced that it will have strong earnings growth in the

future and so they bid up the stock's price now. Fortunately, there is another ratio that you can

use that takes into consideration a stock's projected earnings growth: it's called the PEG. PEG iscalculated by taking a stock's P/E ratio and dividing by its expected percentage earnings growth

for the next year. So, a stock with a P/E ratio of 40 that is expected to grow its earnings by 20%

the next year would have a PEG of 2. In general, the lower the PEG, the better the value, because

you would be paying less for each unit of earnings growth.

Dividend Yield

The dividend yield measures what percentage return a company pays out to its shareholders in

the form of dividends . It is calculated by taking the amount of dividends paid per share over the

course of a year and dividing by the stock's price. For example, if a stock pays out $2 individends over the course of a year and trades at $40, then it has a dividend yield of 5%. Mature,

well-established companies tend to have higher dividend yields, while young, growth-oriented

companies tend to have lower ones, and most small growing companies don't have a dividend

yield at all because they don't pay out dividends.

Dividend Payout Ratio

The dividend payout ratio shows what percentage of a company's earnings it is paying out to

investors in the form of dividends. It is calculated by taking the company's annual dividends per

share and dividing by its annual earnings per share (EPS). So, if a company pays out $1 per share

annually in dividends and it has an EPS of $2 for the year, then that company has a dividend

payout ratio of 50%; in other words, the company paid out 50% of its earnings in dividends.

Companies that distribute dividends typically use about 25% to 50% of their earnings for

dividend payments. The higher the payout ratio, the less confidence the company has that it

would've been able to find better uses for the money it earned. This is not necessarily either good

or bad; companies that are still growing will tend to have lower dividend payout ratios than very

large companies, because they are more likely to have other productive uses for the earnings.

Book Value

The book value of a company is the company's net worth, as measured by its total assets minusits total liabilities. This is how much the company would have left over in assets if it went out of

business immediately. Since companies are usually expected to grow and generate more profits

in the future, most companies end up being worth far more in the marketplace than their book

value would suggest. For this reason, book value is of more interest to value investors than

growth investors. In order to compare book values across companies, you should use book value


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per share, which is simply the company's last quarterly book value divided by the number of

shares of stock it has outstanding.

Price / Book ratio

A company's price-to-book ratio (P/B ratio) is determined by taking the company's per sharestock price and dividing by the company's book value per share. For instance, if a company

currently trades at $100 and has a book value per share of $5, then that company has a P/B ratio

of 20. The higher the ratio, the higher the premium the market is willing to pay for the company

above its hard assets. Price-to-book ratio is of more interest to value investors than growth

investors.

Price / Sales Ratio

As with earnings and book value, you can find out how much the market is valuing a company

by comparing the company's price to its annual sales. This measure is known as the price-to-

sales ratio (P/S or PSR). You can calculate the P/S by taking the stock's current price and

dividing by the company's total sales per share for the past year (or equivalently, by dividing the

entire company's market cap by its total sales). That means that a company whose stock trades at

$1 per share and which had $2 per share in sales last year will have a P/S of 0.5. Low P/S ratios

(below one) are usually thought to be the better investment since their sales are priced cheaply.

However, P/S, like P/E ratios and P/B ratios, are numbers that are subject to much interpretation

and debate. Sales obviously don't reveal the whole picture: a company could be selling dollar

bills for 90 cents each, and have huge sales but be terribly unprofitable. Because of the

limitations, P/S ratios are usually used only for unprofitable companies, since such companies

don't have a P/E ratio.

Return on Equity (ROE)

Return on equity (ROE) shows you how much profit a company generates in comparison to its

book value. The ratio is calculated by taking a company's after-tax income (after preferred stock

dividends but before common stock dividends) and dividing by its book value (which is equal to

its assets minus its liabilities). It is used as a general indication of the company's efficiency; in

other words, how much profit it is able to generate given the resources provided by its

stockholders. Investors usually look for companies with ROEs that are high and growing.


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What Is Technical Analysis?

Technical analysis is a method of evaluating securities by analyzing the statistics generated by

market activity, such as past prices and volume. Technical analysts do not attempt to measure a

security's intrinsic value, but instead use charts and other tools to identify patterns that can

suggest future activity.

Just as there are many investment styles on the fundamental side, there are also many different

types of technical traders. Some rely on chart patterns; others use technical indicators and

oscillators, and most use some combination of the two. In any case, technical analysts' exclusive

use of historical price and volume data is what separates them from their fundamental

counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is

undervalued - the only thing that matters is a security's past trading data and what information

this data can provide about where the security might move in the future.

The field of technical analysis is based on three assumptions:

1. The Market Discounts Everything

A major criticism 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 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 because they illustrate patterns in price movements that often repeat

themselves.


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Use of trends

One of the most important concepts in technical analysis is that of trend. The meaning in

finance isn't all that different from the general definition of the term - a trend is reallynothing more than the general direction in which a security or market is headed. Take alook at the chart below:

It isn't hard to see that the trend in Figure 1 is up. However, it's not always this easy to seea trend:

There are lots of ups and downs in this chart, but there isn't a clear indication of which direction

this security is headed.

The Importance of Trend

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.


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Support And Resistance

Once you understand the concept of a trend, the next major concept is that of support and

resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls

and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by

the prices a security seldom moves above (resistance) or below (support).

Why does it happen?

These support and resistance levels are seen as important in terms of market psychology and

supply and demand. Support and resistance levels are the levels at which a lot of traders are

willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When thesetrendlines are broken, the supply and demand and the psychology behind the stock's movements

is thought to have shifted, in which case new levels of support and resistance will likely be

established.

The Importance of Support and Resistance

Support and resistance analysis is an important part of trends because it can be used to make

trading decisions and identify when a trend is reversing. For example, if a trader identifies an

important level of resistance that has been tested several times but never broken, he or she may

decide to take profits as the security moves toward this point because it is unlikely that it will

move past this level.

Support and resistance levels both test and confirm 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 and resistance, the trend is likely to continue. It is important to note, however, that a


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break beyond a level of support or resistance does not always have to be a reversal. For example,

if prices moved above the resistance levels of an upward trending channel, the trend have

accelerated, not reversed. This means that the price appreciation is expected to be faster than it

was in the channel.

Being aware of these important support and resistance points should affect the way that you tradea stock. Traders should avoid placing orders at these major points, as the area around them is

usually marked by a lot of volatility. If you feel confident about making a trade near a support or

resistance level, it is important that you follow this simple rule: do not place orders directly at the

support or resistance level. This is because in many cases, the price never actually reaches the

whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an

important support level, do not place the trade at the support level. Instead, place it above the

support level, but within a few points. On the other hand, if you are placing stops or short selling,

set up your trade price at or below the level of support.

The Importance Of Volume

What is Volume?

Volume is simply the number of shares or contracts that trade over a given period of time,

usually a day. The higher the volume, the more active the security. To determine the movement

of the volume (up or down), chartists look at the volume bars that can usually be found at the

bottom of any chart. Volume bars illustrate how many shares have traded per period and showtrends in the same way that prices do


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Why Volume is Important

Volume is an important aspect of technical analysis because it is used to confirm trends and chart

patterns. Any price movement up or down with relatively high volume is seen as a stronger,more relevant move than a similar move with weak volume. Therefore, if you are looking at a

large price movement, you should also examine the volume to see whether it tells the same story.

Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is

this a sign of a trend reversal? This is where volume helps traders. If volume is high during the

day relative to the average daily volume, it is a sign that the reversal is probably for real. On the

other hand, if the volume is below average, there may not be enough conviction to support a true

trend reversal.

Volume should move with the trend. If prices are moving in an upward trend, volume should

increase (and vice versa). If the previous relationship between volume and price movements

starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an

uptrend but the up trading days are marked with lower volume, it is a sign that the trend is

starting to lose its legs and may soon end.

When volume tells a different story, it is a case of divergence, which refers to a contradiction

between two different indicators. The simplest example of divergence is a clear upward trend on

declining volume.

Chart types

There are four main types of charts that are used by investors and traders depending on the

information that they are seeking and their individual skill levels. The chart types are: the line

chart, the bar chart, the candlestick chart and the point and figure chart. In the following sections,

we will focus on the S&P 500 Index during the period of January 2006 through May 2006.

Notice how the data used to create the charts is the same, but the way the data is plotted and

shown in the charts is different.

Line Chart

The most basic of the four charts is the line chart because it represents only the 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.


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Bar Charts

The bar chart expands on the line chart by adding several more key pieces of information to each

data point. The chart is made up of a series of vertical lines that represent each data point. This

vertical line represents the high and low for the trading period, along with the closing price. The

close and open are represented on the vertical line by a horizontal dash. The opening price on a

bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely,

the close is represented by the dash on the right. Generally, if the left dash (open) is lower than

the right dash (close) then the bar will be shaded black, representing an up period for the stock,

which means it has gained value. A bar that is colored red signals that the stock has gone down

in value over that period. When this is the case, the dash on the right (close) is lower than thedash on the left (open).


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Candlestick Charts

The candlestick chart is similar to a bar chart, but it differs in the way that it is visually

constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing the

period's trading range. The difference comes in the formation of a wide bar on the vertical line,

which illustrates the difference between the open and close. And, like bar charts, candlesticksalso rely heavily on the use of colors to explain what has happened during the trading period. A

major problem with the candlestick color configuration, however, is that different sites use

different standards; therefore, it is important to understand the candlestick configuration used at

the chart site you are working with. There are two color constructs for days up and one for days

that the price falls. When the price of the stock is up and 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 will usually be red or black, depending on the site. If the stock's price has closed

above the previous days close but below the day's open, the candlestick will be black or filled

with the color that is used to indicate an up day.

Point and Figure Charts

The point and figure chart is not well known or used by the average investor but it has had a long

history of use dating back to the first technical traders. This type of chart reflects price

movements and is not as concerned about time and volume in the formulation of the points. The

point and figure chart removes the noise, or insignificant price movements, in the stock, which

can distort traders' views of the price trends. These types of charts also try to neutralize theskewing effect that time has on chart analysis.


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When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xsrepresent upward price trends and the Os represent downward price trends. There are also

numbers and letters in the chart; these represent months, and give investors an idea of the date.

Each box on the chart represents the price scale, which adjusts depending on the price of the

stock: the higher the stock's price the more each box represents. On most charts where the price

is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical point of

a point and figure chart is the reversal criteria. This is usually set at three but it can also be set

according to the chartist's discretion. The reversal criteria set how much the price has to move

away from the high or low in the price trend to create a new trend or, in other words, how much

the price has to move in order for a column of Xs to become a column of Os, or vice versa.

When the price trend has moved from one trend to another, it shifts to the right, signaling a trendchange.

Conclusion

Charts are one of the most fundamental aspects of technical analysis. It is important that you

clearly understand what is being shown on a chart and the information that it provides. Now that

we have an idea of how charts are constructed, we can move on to the different types of chart

patterns.

Chart PatternsA chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of

future price movements. Chartists use these patterns to identify current trends and trend reversals

and to trigger buy and sell signals.

In the first section of this tutorial, we talked about the three assumptions of technical analysis,

the third of which was that in technical analysis, history repeats itself. The theory behind chart


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patterns is based on this assumption. The idea is that certain patterns are seen many times, and

that these patterns signal a certain high probability move in a stock. Based on the historic trend

of a chart pattern setting up a certain price movement, chartists look for these patterns to identify

trading opportunities.

While there are general ideas and components to every chart pattern, there is no chart pattern thatwill tell you with 100% certainty where a security is headed. This creates some leeway and

debate as to what a good pattern looks like, and is a major reason why charting is often seen as

more of an art than a science.

There are two types of patterns within this area of technical analysis, reversal and continuation.

A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A

continuation pattern, on the other hand, signals that a trend will continue once the pattern is

complete. These patterns can be found over charts of any timeframe. In this section, we will

review some of the more popular chart patterns.

Head and Shoulders

This is one of the most popular and reliable chart patterns in technical analysis. Head and

shoulders is a reversal chart pattern that when formed, signals that the security is likely to move

against the previous trend. As you can see in Figure 1, there are two versions of the head and

shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is

formed at the high of an upward movement and signals that the upward trend is about to end.

Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the

lesser known of the two, but is used to signal a reversal in a downtrend. In this pattern, the

neckline is a level of support or resistance. Remember that an upward trend is a period ofsuccessive rising highs and rising lows. The head and shoulders chart pattern, therefore,

illustrates a weakening in a trend by showing the deterioration in the successive movements of

the highs and lows


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Cup and Handle

A cup and handle chart is a bullish continuation pattern in which the upward trend has paused

but will continue in an upward direction once the pattern is confirmed.

As you can see in Figure, this price pattern forms what looks like a cup, which is preceded by an

upward trend. The handle follows the cup formation and is formed by a generally

downward/sideways movement in the security's price. Once the price movement pushes above

the resistance lines formed in the handle, the upward trend can continue. There is a wide ranging

time frame for this type of pattern, with the span ranging from several months to more than a

year.

Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend reversal - it is considered to

be one of the most reliable and is commonly used. These patterns are formed after a sustained

trend and signal to chartists that the trend is about to reverse. The pattern is created when a price

movement tests support or resistance levels twice and is unable to break through. This pattern is

often used to signal intermediate and long-term trend reversals.


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In the case of the double top pattern in Figure , the price movement has twice tried to move

above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend

reverses and the price heads lower. In the case of a double bottom (shown on the right), the price

movement has tried to go lower twice, but has found support each time. After the second bounceoff of the support, the security enters a new trend and heads upward.

Triangles

Triangles are some of the most well-known chart patterns used in technical analysis. The three

types of triangles, which vary in construct and implication, are the symmetrical triangle,

ascending and descending triangle. These chart patterns are considered to last anywhere from a

couple of weeks to several months.


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The symmetrical triangle in Figure is a pattern in which two trendlines converge toward each

other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a

trend in that direction. In an ascending triangle, the upper trendline is flat, while the bottom

trendline is upward sloping. This is generally thought of as a bullish pattern in which chartists

look for an upside breakout. In a descending triangle, the lower trendline is flat and the upper

trendline is descending. This is generally seen as a bearish pattern where chartists look for a

downside breakout.

Flag and Pennant

These two short-term chart patterns are continuation patterns that are formed when there is a

sharp price movement followed by a generally sideways price movement. This pattern is then

completed upon another sharp price movement in the same direction as the move that started the

trend. The patterns are generally thought to last from one to three weeks.


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As you can see in Figure, there is little difference between a pennant and a flag. The main

difference between these price movements can be seen in the middle section of the chart pattern.

In a pennant, the middle section is characterized by converging trendlines, much like what is

seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a

channel pattern, with no convergence between the trendlines. In both cases, the trend is expected

to continue when the price moves above the upper trendline.

Wedge

The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a

symmetrical triangle except that the wedge pattern slants in an upward or downward direction,

while the symmetrical triangle generally shows a sideways movement. The other difference is

that wedges tend to form over longer periods, usually between three and six months.

The fact that wedges are classified as both continuation and reversal patterns can make reading

signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge

is bearish. In Figure, we have a falling wedge in which two trendlines are converging in a


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downward direction. If the price was to rise above the upper trendline, it would form a

continuation pattern, while a move below the lower trendline would signal a reversal pattern.

Triple Tops and Bottoms

Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These

are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in

a similar fashion. These two chart patterns are formed when the price movement tests a level of

support or resistance three times and is unable to break through; this signals a reversal of the

prior trend.

Confusion can form with triple tops and bottoms during the formation of the pattern because they

can look similar to other chart patterns. After the first two support/resistance tests are formed in

the price movement, the pattern will look like a double top or bottom, which could lead a chartist

to enter a reversal position too soon.

Rounding Bottom

A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that

signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to

last anywhere from several months to several years.


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A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle.

The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in

the cup and handle, makes it a difficult pattern to trade.

Moving averages

Most chart patterns show a lot of variation in price movement. This can make it difficult for

traders to get an idea of a security's overall trend. One simple method traders use to combat this

is to apply moving averages. 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.

Once the day-to-day fluctuations are removed, traders are better able to identify the true trend

and increase the probability that it will work in their favor.

Types of Moving Averages

There are a number of different types of moving averages that vary in the way they are

calculated, but how each average is interpreted remains the same. The calculations only differ in

regards to the weighting that they place on the price data, shifting from equal weighting of each

price point to more weight being placed on recent data. The three most common types of moving

averages are simple, linear and exponential.

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. As you can see in Figure 1, a trader is able to

make the average less responsive to changing prices by increasing the number of periods used in


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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.

Many individuals argue that the usefulness of this type of average is limited because each pointin the data series has the same impact on the result regardless of where it occurs in the sequence.

The critics argue that the most recent data is more important and, therefore, it should also have a

higher weighting. This type of criticism has been one of the main factors leading to the invention

of other forms of moving averages.

Linear Weighted Average

This moving average indicator is the least common out of the three and is used to address the

problem of the equal weighting. The linear weighted moving average is calculated by taking thesum of all the closing prices over a certain time period and multiplying them by the position of

the data point and then dividing by the sum of the number of periods. For example, in a five-day

linear weighted average, today's closing price is multiplied by five, yesterday's by four and so on

until the first day in the period range is reached. These numbers are then added together and

divided by the sum of the multipliers.

Exponential Moving Average (EMA)

This moving average calculation uses a smoothing factor to place a higher weight on recent datapoints and is regarded as much more efficient than the linear weighted average. Having an

understanding of the calculation is not generally required for most traders because most charting

packages do the calculation for you. The most important thing to remember about the

exponential moving average is that it is more responsive to new information relative to the

simple moving average. This responsiveness is one of the key factors of why this is the moving

average of choice among many technical traders. As you can see in Figure 2, a 15-period EMA

rises and falls faster than a 15-period SMA. This slight difference doesnt seem like much, but it

is an important factor to be aware of since it can affect returns.

Major Uses of Moving Averages

Moving averages are used to identify current trends and trend reversals as well as to set up

support and resistance levels.

Moving averages can be used to quickly identify whether a security is moving in an uptrend or a

downtrend depending on the direction of the moving average.


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Indicators And Oscillators

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 are used in two main ways: to confirm price movement and the quality ofchart patterns, and to form buy and sell signals.

There are two main types of indicators: leading and lagging. A leading indicator precedes price

movements, giving them a predictive quality, while a lagging indicator is a confirmation tool

because it follows price movement. A leading indicator is thought to be the strongest during

periods of sideways or non-trending trading ranges, while the lagging indicators are still useful

during trending periods.

There are also two types of indicator constructions: those that fall in a bounded range and those

that do not. The ones that are bound within a range are called oscillators - these are the mostcommon 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.

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. 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 oppositedirection. This signals to indicator users that the direction of the price trend is weakening.

Indicators that are used in technical analysis provide an extremely useful source of additional

information. These indicators help identify momentum, trends, volatility and various other

aspects in a security to aid in the technical analysis of trends. It is important to note that while

some traders use a single indicator solely for buy and sell signals, they are best used in

conjunction with price movement, chart patterns and other indicators.

Accumulation/Distribution Line

The accumulation/distribution line is one of the more popular volume indicators that measuresmoney flows in a security. This indicator attempts to measure the ratio of buying to selling by

comparing the price movement of a period to the volume of that period.

Calculated:

Acc/Dist = ((Close - Low) - (High - Close)) / (High - Low) * Period's Volume


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Moving Average Convergence

The moving average convergence divergence (MACD) is one of the most well known and used

indicators in technical analysis. This indicator is comprised of two exponential moving averages,

which help to measure momentum in the security. The MACD is simply the difference between

these two moving averages plotted against a centerline. The centerline is the point at which thetwo moving averages are equal. Along with the MACD and the centerline, an exponential

moving average of the MACD itself is plotted on the chart. The idea behind this momentum

indicator is to measure short-term momentum compared to longer term momentum to help signal

the current direction of momentum.

MACD= shorter term moving average - longer term moving average

When the MACD is positive, it signals that the shorter term moving average is above the longer

term moving average and suggests upward momentum. The opposite holds true when the MACD

is negative - this signals that the shorter term is below the longer and suggest downward

momentum. When the MACD line crosses over the centerline, it signals a crossing in the moving

averages. The most common moving average values used in the calculation are the 26-day and

12-day exponential moving averages. The signal line is commonly created by using a nine-day

exponential moving average of the MACD values. These values can be adjusted to meet the

needs of the technician and the security. For more volatile securities, shorter term averages are

used while less volatile securities should have longer averages.

Another aspect to the MACD indicator that is often found on charts is the MACD histogram. The

histogram is plotted on the centerline and represented by bars. Each bar is the difference between

the MACD and the signal line or, in most cases, the nine-day exponential moving average. The

higher the bars are in either direction, the more momentum behind the direction in which the bars

point.

Relative Strength Index

The relative strength index (RSI) is another one of the most used and well-known momentum

indicators in technical analysis. RSI helps to signal overbought and oversold conditions in a

security. The indicator is plotted in a range between zero and 100. A reading above 70 is used to

suggest that a security is overbought, while a reading below 30 is used to suggest that it is

oversold. This indicator helps traders to identify whether a securitys price has been

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


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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 fewer days, the RSI will be more

volatile and will be used for shorter term trades.

On-Balance Volume

The on-balance volume (OBV) indicator is a well-known technical indicator that reflects

movements in volume. It is also one of the simplest volume indicators to compute and

understand.

The OBV is calculated by taking the total volume for the trading period and assigning it a

positive or negative value depending on whether the price is up or down during the trading

period. When price is up during the trading period, the volume is assigned a positive value, while

a negative value is assigned when the price is down for the period. The positive or negative

volume total for the period is then added to a total that is accumulated from the start of the

measure.

It is important to focus on the trend in the OBV - this is more important than the actual value of

the OBV measure. This measure expands on the basic volume measure by combining volume

and price movement.

Similarities between Technical and Fundamental Analysis

Technical analysis and fundamental analysis both aim to help determine a buy-in price and sell

price for a stock. By doing so, both analyses help to reduce the probability of losing and increase

the probability of winning.

Gambling dens earn by the concept of probability. So does technical and fundamental analysts.

Technical analysts go for low risk high probability setups. Fundamental analysts reduce risks or

increase probability of success by determining an intrinsic value for the company and enter with

a margin of safety.

Both types of analyses give an advantage to the analysts as compared to a normal layman who

buy based on hear-say, gut feel and look-look-see-see etc.

Differences between Technical and Fundamental Analysis

The main thing a fundamental analyst does is to analyse the company's business prospects

(economic and industry factors), financial statements, cashflow statements, and attempt to

calculate a value for the company, using NAV, P/E ratios, P/B ratios, Discounted Cash Flow


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Valuations method, etc. If the price is at a discount, i.e. at a margin of safety, then buy. If it's not,

then do not buy, or sell. "Price is what you pay, value is what you get."

On the other hand, a technical analyst believes that company fundamentals are all reflected in the

charts. All there is to know about the company can be found in the charts. Technical analysis is

about mass human psychology, and the more people using it, the more self-fulfilling it becomes.There is little issues with any creative accounting a rouge company might do. "Charts do not lie."

The timeframe of a fundamental analyst is also generally longer than that of a technical analyst.

The main reason is because for a fundamental analyst who analyses financial statements, such

statements only come out quarterly, hence the time lag. However, for a technical analyst, the

time frame is generally much shorter, from a matter of hours to days or months. Lastly,

fundamental analysts usually average down when there's value. Technical analysts usually

average up on breakouts.

Criticisms of Technical Analysis

Non-believers of technical analysis (who are usually staunch fundamental analysis believers) see

it like gambling. Any attempt to predict future price actions is a form of guessing and gambling.

They fail to see how drawing of trendlines here and there like little kids, and seeing technical

indicators of past price actions, will give an idea of a stock's worth. "Do not predict the market",

they say.

The fact that most use against technical analysis is that the world's richest man, Warren Buffett,

uses mainly fundamental analysis. Also, some of the people whom I have come across tells me

that their earnings are more when they use fundamental instead of technical analysis.

However, from personal experience, technical analysis does work when done correctly. Strict

money management and tight cut loss rules are paramount to the success of technical analysis. In

addition, the mindset of a technical analyst must be different from a fundamental analyst.

Criticisms of Fundamental Analysis

The main attack on fundamental analysis is value traps and fake information. Companies such as

Enron, Chartered, Ferro China, Beauty China, are used as examples. The critics I know so far on

fundamental analysis had bad experience with buying and holding. A lot of Singaporeans also

lost money on investing in the GLC Chartered Semiconductor. In short, fundamental analysis has

failed them.

The second criticism on fundamental analysis has its basis in the theory of efficient market

hypothesis. The theory states that the market's price is always the correct one. Any past trading

information is already reflected in the price of the stock and, therefore, any analysis to find

undervalued securities is useless.


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With regards to the first criticism, it's in my belief that these people had not done proper

homework on fundamental analysis before making their buy decisions. Also, they were greedy

for more, even when prices are high. Everyone hopes to be the next Warren Buffett, but are

sorely disappointed. Just like technical analysis done wrongly would lead to monetary losses, so

would fundamental analysis!

The efficient market hypothesis theory hold more weight in my opinion, which is the main

reason why I do not totally forego technical analysis as part of my arsenal of determining a buy-

in price.

Combining Technical and Fundamental Analysis?

Although technical analysis and fundamental analysis seems to be radically different, in actual

fact, they are linked at times. More often than not, great fundamentals are usually together with

great technical setups.

As for me, I have experienced some success in combining the two analytical techniques,

particularly for Macquarie International Infrastructure Fund and Star hill Global REIT. Stocks

are identified using fundamental analysis to determine if a stock is undervalued. Technical

analysis is then used to attempt an optimal entry into the stock to improve the gains on

investment and obtain the best margin of safety. Averaging down is done on buying every

support. In addition, if an extremely bearish technical setup is seen, then even though

fundamentals look good on reports, we have to beware of a possible bad news announcement

coming soon. It would then be good to wait for entry.

On the other hand, a technical analyst could look into fundamentals to add strength and

conviction to a technical buy/sell signal.

Mixing these two schools of thoughts isn't an easy process, and is sometimes frowned upon by

the most devoted technical analysts or fundamental analysts. The strategies and mindsets of each

is different, and not being clear in differentiating your strategies and mindsets could lead to poor

buy-ins. However, for the recreational investor/trader like me, combining and understanding

these two schools of thoughts certainly offer benefits. At least you have an analytical reason for

buying instead of blindly listening to other "analysts".


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Fundamental Analysis of BHEL

Graphical Representation of the above research

Per share ratios Mar ' 12 Mar ' 11 Mar ' 10 Mar ' 09 Mar ' 08EPS (Rs) 28.76 122.8 88.06 64.11 58.41

Dividend per share 6.4 31.15 23.3 17 15.25

Profitability ratios

Gross profit margin (%) 18.86 19.17 16.66 14.45 17.65

Net profit margin (%) 14.36 13.99 12.55 11.36 13.87

Leverage ratios

Total debt/equity 0.01 0.01 0.01 0.01 0.01

Liquidity ratios

Current ratio 1.47 1.32 1.37 1.36 1.38

Quick ratio 1.11 1.03 1.04 1.02 1.09

Payout ratios

Dividend payout ratio (cash profit) 23.22 27.35 27.93 28.03 27.66

Cash earnings retention ratio 76.53 71.94 71.89 70.87 72.83


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Work In Progress

A detailed research on Technical analysis and the chart patterns is yet to be done and hence it

will be incorporated in the final report. The final report will consist of a summary of technical

analysis and its practical implication in order to relate it to the real world.

Methodology

- Secondary data is used in this project as acquiring primary data is a major constrain andtime constrain are forcing to rely completely on Secondary data.- Detailed knowledge about the Indian economy, Industry and Company is provided in a

chronological order along with ways to analysis stock using fundamental and technicalanalysis.

- Fundamental analysis is based on various financial data provided in the annual report- Technical analysis is performed using various tools and indicators like candle stick charts

etc. to identify the stock movement.

Schedule

Interim Report-19th October Final Report-26rd October


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Report on fundamental and technical analysis

Documents

Transcript of Report on fundamental and technical analysis