Technical an[1]. Report

8/8/2019 Technical an[1]. Report

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A

Project Report

On

How To Profit From Technical Analysis

Submitted By

Ravi Mandhan

Contents

1. Introduction to Technical Analysis

2. Chart Patterns


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3. Volume Analysis

4. Significance of Moving Average

5. Practical Analysis of S&P CNX Nifty-50

Introduction

The methods used to analyze securities and make investment decisions fallinto two very broad categories: Fundamental Analysis and Technical Analysis.Fundamental analysis involves analyzing the characteristics of a company in order to

estimate its value. Technical analysis takes a completely different approach; it doesn't

care one bit about the "value" of a company or a commodity. Technicians (also calledchartists) are only interested in the price movements in the market.

In short we can say that fundamental analysis helps in selecting stock for

investment and technical analysis helps in selecting timing of the investment. An Investor

can make a good profit by using these weapons (fundamental and technical analysis).

TECHNICAL ANALYSIS

There are different kinds of charts we see at any point in time in themarket. Technical Analysis enables us to understand these charts and make the decisionof the investment and also at what point of time one should invest in a particular stock.


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For taking investment decisions (whether short term or long term) it is very useful to use

technical analysis as a tool. In current point of time Technical analysis is used by almost

every financial management company for finding the time of investment (when to buy ),time of divestment (when to book profits ) and when to be away from market. By using

technical analysis we can even make profits in bear market, we can make profits in the

volatile market or even one can make money in the situation or market like (blackMonday) January 2008. In technical analysis the shape of the chart is very significant. In

this we can find what is the past performance of the stock or any security and from its

past performance when the prices are likely to go. There are also some limitations oftechnical analysis like it dont care what is happening in the company or with

fundamentals of the company, it only cares the past of company and considering past it

forecast what would be the likely future of company. It does not consider the economic

situation of the country and global scenario for doing business.So considering all the advantages and limitations of Fundamental and

Technical Analysis many companies keep these both departments separate. For taking

investment decision they first find the company which is fundamentally strong and are

suitable in current scenario of economy by using Fundamental Analysis. But sometimesthey find the stocks of these companies are already appreciated. So now what should they

do? The answer is technical analysis. Technical analysis will tell us that what should donow, whether we should buy these stocks or should wait for fall so that we will be able to

buy at lower price.

Now we will see practically how the technical analysis helps us for

taking investment decision. For this we will first see the different kinds of charts, and inthat particular situation what should an investor do?

1) Upward Price Trend


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In this chart the stock is touching higher and higher high, and also higher low.

This is called as the upward price trend. The black line is showing the support price forthe stock suggesting that its difficult to fall below this price. At this point of time the

stock has the support at around level of 82. Initially we found after forming the upward

price trend stock price rise since the level of 72 and came back to 65. After falling at thelevel of 65, stock bounced back and touched the new high of 80 within two months.

Again it went down and formed the higher low of 70 than previous one of 65. And now it

touched the new high of 95. All this movement of stock is the sign of Upward PriceTrend. Now it is trading around level of 82. According to our previous experience on the

stock movement it suggests that at this point of time the stock can bounce back again. An

investor who wants to enter into the stock it is the best time to buy keeping the stop loss

of below 80.

2) Downward Price Trend


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In this chart the, stock is touching lower and lower low, and also lower high. This is

called as the Down ward price trend. The upper straight line is showing the resistance

price for the stock suggesting that its difficult to rise above this price.At this point of time the stock has the support at around level of 5500-5600, which is

suggested by the lower straight line (support line).

Initially we found that after forming the downward price trend stock price fell to the level

of 6400 (L3) and came back to 7400 (7400). After rising at the level of 7400, stockstarted facing its resistance level. As a result of which again it went down and formed

the lower low of 6000 than previous one of 6400. And now it is trading at its life time

low of 5800 which is also a resistance level. At this point of time an investor who isholding the stock should sell it. Also if an investor who wants to short-sell the stock it is

the best time to short-sell keeping the stop loss of above 6000.

3) Trading Range


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Trading Range is an another chart pattern. In this chart the price of the stock

form the range and not able to go beyond upper limit and not even break the lower limit.The difference between the high and low prices traded during a period of time; becomes

the trading range for the stock. When an investor find this type of trading range in anystock, then the best way to make profit is-buy at the lower price ( when stock traded onlower area of chart), and sell when the stock traded at the higher region of trading range.

In this chart, the stock is trading in the range of 33-42. Now the stock is trading around

level of 35. If an investor wants to invest in this particular stock, than he can start buyingat the level of 33-34. But he have to book his profits at 41-42 because its unlikely for the

stock to rise beyond that level unless something happens to improve the fundamentals of

the company.

3) Head and Shoulders


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Head and Shoulders is one of the most important chart pattern in the technical

analysis.In this chart we can see that how the reversal happens for the stock.In this chart,initially

the stock was in uptrend and was forming new highs but at some point of time, it was not

able to go beyond the higher price, and started falling. The second shoulder shows thatthe price was likely to go up beyond the head (the higher point).But it started falling and

formed the head and shoulder pattern.

Now the investor should be aware and if price is falling below the neck line, then he

should sell the shares.At the time of this breakout one can also short sale the stocks in the

derivative market.In short the head and shoulders pattern finds the exit time for theparticular stock.

4) Double Top


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A double top pattern is formed when the price has been trending higher. After the profit

booking at higher levels the stock again started rising but this time the stock failed totouch the new high and came down this formation is known as double top pattern. This

shows that at the higher levels the stock is facing the selling pressure and more and more

sellers are becoming active to sell the shares. This higher level becomes the resistance

level for the stock price.If an investor is holding the shares and is in the profit should book his profit. Or a trader

can make profit by short selling at this particular counter.

5) Rounding Top


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It is a pattern showing the bearishness on the stock from the investors. During the time ofuptrend the stock formed another pattern of rounding top. So the shows the

knowledgeable investors are offloading their positions it then the market because they

dont expect the further rise in the stock price. Due to the continuous rise now theinvestors are thinking that the stock become overvalued.

At this point of time, price fall in expected in the stock. Relative strength index also

confirms this movement. An investor who have holding of shares in this counter shouldbook his profit because its unlikely to go beyond this price at this point of time.

6) Symmetrical Triangle


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In this chart the gold was in uptrend from the past two months but then it formed the

symmetrical triangle. In the chart, a gold touched its a high of 840 dollars. After profit

booking at higher levels, it again went up to 820 dollars and not able to go beyond that.Gold continuously formed the lower highs in higher lows suggesting a formation of

symmetrical triangle.

In this chart, symmetrical triangle formed from the uptrend, so it is expected that the

breakout will occur on the higher side.

It is suggested that after the breakout on the higher side an investor should enter in the

gold by buying it for the potential capital gain.

7) Ascending Triangle


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8) Descending Triangle

In this chart, the share price touched the high of 2.23. But after that it was not able to risebeyond that level. But stock was continuously touching its high and on the lower side it

was forming higher low. This is known as the formation of Ascending triangle. AnInvestor who wants to enter into the stock should wait until the breakout on the higher

side. As the triangle has formed from uptrend, it is expected that the breakout will occuron the higher side.After the breakout at 2.23, it is buying opportunity for the investors who wants to start

buying at the particular counter.

Similarly, one can start selling or short-selling on the after downside breakout in the

Descending triangle.

9) Inverted Head and Shoulders


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As the name suggests the Inverted Head and shoulder is the opposite of Head and

Shoulder price pattern. It gives the bullish prospects to the stock after breakout. Bothsides of the head are shoulders. When right shoulder completes, and price rise above the

neckline, it means upside breakout has occurred.

Inverted Head and Shoulder refers that the trend of the stock price has changed and afterthe breakout it is likely that the additional buyer would be added and stock price would

rise.

In this chart we can see that after upside breakout at the neckline stock is rising rapidly. It

is always suggested, when a stock form inverted head and shoulder pattern, buying

should be initiated on that particular counter.

10) Rounding Bottom


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In this chart, the stock was continuously falling and touching lower and lower

lows. After the point B stock become less steep. It suggested that the stock hasbeen hammered continuously and now knowledgeable investors are finding the

share undervalued and accumulating the shares in the market. On the other hand

small investors are selling as they panicked out (due to the continuous loss). It isknown as the formation of rounding bottom. Now the stock trend started moving

up as some more investors have added in the buying side.

After formation of this pattern it is suggested that start buying on this particular

counter for the potential capital gain.

11) Double Bottom


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A double bottom pattern is formed when price has been trending lower, but when it

bounces back and again it went lower but this time stock is not able to break previous low

(as we can see the double bottom line), and bounce back again. This is the formation ofdouble bottom. At that point of time, stock got the support price of rupees 28. An investor

who is looking an entry point in this particular stock this is the best time to buy the stockkeeping the stop loss below 28.

From this support level stock started moving up and within two months stock reached at

the level of 38. Any investor who bought the share at 26, now he can book his profits as

he is in the profit of 45%.

Generally, the investors who are bullish on any particular counter, but finds that the stock

is in downtrend seeks this opportunity. And when they find the double bottom formationin the stock price then they start buying. It is always suggested that after formation of this

pattern one should start buying.

12) Parabolic Curve


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In this chart, after showing the flat kind of appreciation in the initial years, the generalelected companys stock price rises at a very fast speed. Through the dark red line, we

can see that how stock moved in previous few years. This type of formation is called as

parabolic curve. It is not safe to enter in this share at this time. If one wants to buy the

share he should keep the intermediate stop loss.

It is always suggested that keep away from the parabolic curve pattern or buy the sharekeeping strict stop loss.

13)Erratic Volatility


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Volume Analysis

Now we will see how Analysis of volumes can help us in selection ofstock or how important are the volumes when an investor wants to take an

investment decision.

Some Investors check the prices of their stock regularly but dont careabout the trading volumes of the stock at all. Those investors are uninformed

about the major factor that affects the prospects of their stock. Checking volumes

of the stock is as important as the price of the stock. If the stock makes anunexpected move to the upside and there is no news on the company, the large

increase in the trading volumes indicates that something significant has probably

happened, but has not yet been reported. It is probably something happened in thecompany and that information might be leaked and results into the movement of

the stock. On the other hand, a price move with a small or no increase in trading

volume is more likely to develop from a temporary imbalance in the supply and

demand relationship. Watching the volume of trading and making comparison to

average trading volume enables an investor to distinguish between price movesthat can develop momentum and those that are just meaningless random

movements. The main point to remember is that a large increase in volumevalidates a price move to upside while a small or no increase in trading volumes

discredits it.

Now, we will see some charts, in which we will try to understand the

significance of volumes:


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a) Upside Breakout from Trading Range:

After failing several times to breakout above the resistance level,the stock price finally starts moving up with a large increase in trading volumes

both before and after the breakout. This implies the price rise will continue a

while. The increase in the trading volumes means at the time of breakout meansmany additional investors have become buyer of the stock because they believe

the significant improvement in the prospects of the company has occurred.


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b) Upside Breakout from Trading Range:(Low Volumes)

Note that the trading volume during the breakout has only increased

slightly comparing to average trading volumes of the preceding time period. Fewnew investors are investing at this time. This breakout may be only a temporary

imbalance between the relationship between demand and supply. The stock price

may stay above the breakout point for some time but, the small increase in the

volume indicates the price is unlikely to go much higher.


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c) Downside Breakout from Trading Range:

Here we can see a price breakout to a downside on a large increase in

volumes. This increase could be caused by some problems within the company.

Probably those investors who have become aware of the situation have sold and

others have followed their lead. Having broken through the support level on an

increase in volume, the stock price is likely to drop fast and the extent of the fallis probably going to be large.

d) Upside Breakout from Symmetrical Triangle:


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(High volumes)

This is the type of symmetrical triangle that develops whenboth buyers and sellers are become eager. The buyers are willing to pay

higher price when time passes and sellers are eager to sell at lower price.

Gradually the balance between supply and demand changes in the favor of

buyer, who wants more shares than are available at these price levels. In thissituation the extra demand forces the breakout to the upside. The large

increase in the trading volume was a leading indication that the price wouldbreakout to the upside. Note the high trading volumes is continuing as the

price moves above the highest point in the triangle. This is a sign that price

will rise for a while.


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e) Downside Breakout from Symmetrical Triangle: (Low Volumes)

This chart demonstrates the exception to the rule that an increase intrading volume is required for a price movement to be large. A significant move

to the upside must be supported by an increase in volume. But a price move to the

downside can be large when there is no or little increase in trading volume. All it

takes for a stock price to move is lack of demand on the part of the buyers.Without this support, a stock price can drift lower over time and the price drop

can a sizeable. This might be due to some minor problems in company so thatbuyers have lost interest in the stock.


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f) Upside Breakout from Ascending Triangle [High Volume]

Ascending triangle provide a visual representation of rising demand absorbing a

limited supply. Because of this unbalanced relationship, when an ascending

triangle forms, the implication that the breakout will be to the upside. In this case,the large increase in trading volume that occurred along with the breakout

indicates that price will continue to to rise for a while. The minimum expectation

is that the rise in price will be equal to the height of the triangle.


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g) Downside Breakout from Descending triangle [High Volume]

This descending triangle represents an unequal contest between sellers

who are more eager to sell than buyers are to buy. The expected result is realized

when the price breaks out to the downside. The large increase in the tradingvolume during the breakout validates the price move. Once the breakout has

happened the probability is that the decline will persist for a while longer unless

something happens to improve the prospects for the company. If the breakout had

occurred with a little or no increase in trading volume, the subsequent declinewould probably be slower, but could go as so far.

h) Upside Breakout from Downtrend [High Volume]


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After the breakout from downtrend occurred, an uptrend was

established. The trading volume increased and continued as the price rose. Its

possible to know when a downtrend will end or whether an uptrend will follow.This means its best to buy only after a breakout rather than try to guess when the

downtrend will stop.


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i) Downside Breakout from Uptrend [slightly high volume]

After the breakout from this uptrend a downtrend was established.The trading volume during the breakout rose only slightly and was followed by a

period of lower volume. Lower trading volume often accompanies a downtrend,

and the price will probably drift lower for an extended period.

Significance of Moving Averages


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The Moving Average is shown as a line that smooths out the fluctuations

in the stock price. If the stock price is moving up, the moving average line movesup more gradually. If the price is moving down, the average line moves down

more gradually. If the stock price is fluctuating up and down, the moving average

line moves in a relatively horizontal direction. Long time moving average linesare also treated as trend decider. When price of any stock is under long term

moving average line (say 200 DMA) than it is a bearish sign for that stock.

Construction of Moving Average

A Moving Average is the average of a series of consecutive closing

prices. For example : A 10 DMA is the average of prices from the 10 most recentbusiness days. Tomorrow the oldest price will be dropped from the average and

new closing price will be added to it. Because the moving average is calculated

from past data, it trials the current price. Some of the most popular moving

averages are 5, 10, 20, 50, 100 and 200 days. The selection of the moving averagedepend upon the time horizon of the investor for investment. Long term investor

would choose the more days moving averages (200 DMA) and the short terminvestors would choose lesser time moving average.

Exponential Moving Average

There are two types of moving averages. The first one is Simple Moving

Average (SMA) which we discussed above and another is Exponential Moving

Average (EMA). EMA gives the extra weight to the more recent day in thesequence, which results in an average that is up to date than the Simple Moving

Average.

Stock Prices and Moving Averages

Now we will see the relationship between stock price and short and longterm moving averages. The stock price and moving averages plays a very

important role for decision making for any investor. For understand how? We will

see the different combinations of stock price and Moving Averages.

Moving Averages


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A) Stock price falls through moving average

In this chart, the stock price holds above the moving average for a long time. When the

price falls through the moving average, this change in the relationship indicates that theprice momentum has changes to the downside. An investor holding this stock who has

the profit in it should sell to retain that capital gain.

B) Stock price rise above moving average

In this chart, the stock price was below the moving average for a long time. When theprice rises above the moving average, this change in the relationship indicates that the

price momentum has changes to the upside. An investor looking this stock for buying,

should invest for potential capital gain.

C) Stock Price Remained above the Moving Average


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In this chart, the moving average line is following the upward movement in the price.

When a moving average follows a substantial price uptrend, this relationship confirms thedirection of the price movement. Note also that trading volume in this case is also

important which confirms the upward price movement. This chart illustrates a stock that

should be bought early in the uptrend and held for the capital gain.

D) Stock Price Trading below the Moving Average

Here the moving average line is trailing the price downward. When a moving average

follows the price in a sustained downtrend, the relationship confirms the direction of that

price trend. Note that the low volume is typical of downtrend. This chart illustrates astock that should not be bought and, if held, should have been sold as soon as the

downtrend was established.

E) Short-term Moving Average crossing above Long-term Moving Average


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This chart shows a change in the relationship between long and short term movingaverage lines. The short-term moving average was below the long term moving average

for a long time. When it crossed above the long term average, it indicates a positive

change in the prospects of the stock. This implication applies because the short termaverage is reflective of more recent pricing of the stock.In this case an investor is alerted to probability that the stock price may be about to make

a move to the upside. The rise in trading volume is confirming the change in direction,

and an investor can buy for the potential gain.

F) Short-term Moving Average crossing below Long-term Moving Average


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This chart shows a change in the relationship between long and short term moving

average lines. The short-term moving average was above the long term moving average

for a long time. When it crossed below the long term average, it indicates a negativechange in the prospects of the stock. This implication applies because the short term

average is reflective of more recent pricing of the stock.

In this case an investor is alerted to probability that the stock price may be about to makea move to the downside. There is no need of increased volumes for moving downward.

G) Stock Price crosses above both the Moving Averages


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This stock price has been below the short and long term moving averages. When it

moves up through both the averages, this surge in the current price is a sign of developingstrength and signals there are positive prospects ahead for the stock.

Another positive indication is that the trading volume increased when the stock price

broke up through the averages. An investor would be justified in buying this stock for a

potential gain.

H) Stock Price below both the Moving Averages


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This stock price has been above the short and long term moving averages. When it moves

down through both the averages, this fall in the current price is a sign of developing

weakness and signals there are negative prospects ahead for the stock.For moving down, its not essential to increase in trading volumes. An investor would be

justified in selling this stock, or start short selling for a potential gain.


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Practical Analysis of Nifty 50

After understanding different kinds of charts, buying and selling signals, when to buy,

when to sell, significance of moving averages while taking investment decisions, now we

will do analysis of S & P CNX Nifty 50 and will see how it have reacted in last fewmonths.

It is the chart of S&P CNX Nifty in April 2009. In this chart, the nifty remained below

the 200 day moving average during 6 months and below the 50day moving averageduring most of the time. And the price rises during the 50 day moving average

(confirmed by the high volume), nifty increased to 3100 level, which is a resistance levelof nifty (200 DMA).

On 2nd April 2009 breakout occurred on the higher side on nifty. Nifty went above 3100.This change in the relationship indicates that the price momentum has switched upside.

In this chart during the past six months nifty was also getting the direction from

symmetric triangle. On 20th march 2009 breakout occurred on the upside was significantfor nifty. It changed the momentum to the upside. As result of which nifty rise 150 points


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on this day. A long term investor who wanted to invest in the market it was the best time

to enter in the market keeping the stop loss below 3100.


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In this chart we will analyze nifty 50 at current valuation and after touching almost years

high, what should an investor do. In September 2008 there was an upside breakout withlow volumes. Note that the trading volume during the breakout and before and after the

breakout was changed slightly comparing to average trading volume of the preceding

time period. Few new investors were investing at this point. This breakout was only thetemporary imbalance in the relationship between demand and supply. Therefore, the nifty

was above the breakout point only for some time, the small change in volume indicates

that the price was unlikely to go much higher.

Now we will see another upside breakout with the high volumes in April. In April 2009, Nifty 50 has given another upside breakout but this time with high volumes. Thisbreakout with high volumes suggesting the buyers are becoming more eager to buy than

sellers are to sell and there are additional buyers who are joining the buyers side as a

result of which the index has given the rise up to 4500. In between their was an important

event in Indian politics which has given the new enthusiasm to Indian stock market andnifty rises 20% in single trading session.


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At the lower levels after forming triple bottom at about 2500, the sharp pull back up to

the level of 2700 and than upside breakout from 50 Day Exponential Moving Average at

the same level charts suggested the hope of reviving the market. It was not the end ofNifty journey it continued and again Nifty was facing another resistance at 3000. But this

resistance level (200 DMA at 3000) was not enough to stop the Nifty and getting back.

Nifty given another upside breakout at 3000 and rises about 200 points in single tradingsession with high volumes. From here on real test of the nifty started and it was going to

face tough resistance of 200 DMA. In the month of April itself Nifty reached at 3350

(200 DMA). This time Nifty was facing real resistance. Two times Nifty crossedresistance but not supported by volumes. But again it given breakout and this supported

by higher volumes as a result of which Nifty started non stop journey towards its 52 weak

high kind of levels.

On 16th of May 2009, Congress won the general elections with huge difference. It formed

the new hope of further liberalization Industrial sector in India. On 18 th May, CNX S&P

Nifty 50 to make new history of touching upper circuit twice in on trading session. First

circuit was hit in 50 seconds and seconds. The trading was halted for one hour. After onehour when trading started, this time Nifty hit second upper circuit in about 30 seconds.

This fundamental change in Indian markets started the hope of new highs for Indianmarkets and Nifty went all the way to 4350 from 3720 in on trading session.

At current levels as it is a consolidation phase for Nifty an investor who wants to invest

in the market should wait for correction. He can take long position in nifty if it correctand finds support at 3770-3800 keeping the stop loss below 3752 (200DMA) or he should

also go long if nifty cross the level of 4650. If Nifty crosses 4650 than it can go up to

5200 and than new highs of above 6300.

Technical an[1]. Report

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