Technical Analysis Rudramurthy

@ B.V.RUDRAMURTHY@ B.V.RUDRAMURTHY 11

TECHNICAL ANALYSISTECHNICAL ANALYSIS

RUDRAMURTHY BVRUDRAMURTHY BV


DEFINITION:DEFINITION:

Technical Analysis is the study of:Technical Analysis is the study of: PRICE.PRICE. VOLUME.VOLUME. OPEN INTEREST.OPEN INTEREST.

It is the study of market action through the It is the study of market action through the

help of charts and other technical indicatorshelp of charts and other technical indicators

so as to forecast the trend.so as to forecast the trend.


ASSUMPTIONS:ASSUMPTIONS:

Current Price of an underlying asset Current Price of an underlying asset discounts all information.discounts all information.

Price always moves in trends.Price always moves in trends.

History repeats often.History repeats often.


DIFFERENCES:DIFFERENCES:FUNDAMENTAL ANALYSISFUNDAMENTAL ANALYSIS TECHNICAL ANALYSISTECHNICAL ANALYSIS

1. TIME CONSUMING.1. TIME CONSUMING. 1. QUICK STUDY.1. QUICK STUDY.

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

3. INTRINSIC VALUE.3. INTRINSIC VALUE. 3. STUDY OF CHARTS.3. STUDY OF CHARTS.

4. INCLUDES ECONOMIC, 4. INCLUDES ECONOMIC, INDUSTRY AND COMPANY INDUSTRY AND COMPANY ANALYSIS.ANALYSIS.

5. APPLIED FOR FEW 5. APPLIED FOR FEW MARKETS UNDER STUDY.MARKETS UNDER STUDY.

4. PRICE, VOLUME AND OPEN 4. PRICE, VOLUME AND OPEN INTEREST ANALYSIS. INTEREST ANALYSIS.

5. CAN BE APPLIED TO ANY 5. CAN BE APPLIED TO ANY MARKET AND INSTRUMENT.MARKET AND INSTRUMENT.


ADVANTAGES:ADVANTAGES:

Can be used on any markets and on any Can be used on any markets and on any underlying asset.underlying asset.

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

speculators.speculators.Helps in understanding market psychology.Helps in understanding market psychology.Helps in economic forecasting.Helps in economic forecasting.


LIMITATIONS:LIMITATIONS:

It is a Probabilistic study and not deterministic It is a Probabilistic study and not deterministic study.study.

Chart Patterns are very subjective in nature.Chart Patterns are very subjective in nature. Does not works accurately for illiquid markets Does not works accurately for illiquid markets

and underlying assets with controlled regime.and underlying assets with controlled regime. Past may not be the indicator of future.Past may not be the indicator of future. Random walk theory. Random walk theory. Contradicting views by different indicators.Contradicting views by different indicators.


DIFFERENCES IN APPLICABILITY:DIFFERENCES IN APPLICABILITY:

Technical analysis as applied to stockTechnical analysis as applied to stockMarkets is same to even derivative markets.Markets is same to even derivative markets.However the following things shall be kept However the following things shall be kept In mind:In mind: Pricing Structure.Pricing Structure. Time period.Time period. Margin requirements.Margin requirements. Timing is everything in futures market, Timing is everything in futures market,

where buy and hold strategy does not where buy and hold strategy does not work.work.


DOW THEORYDOW THEORY

CHARLES DOW CHARLES DOW &&

NELSONNELSON


DOW THEORY:

Ideas of Charles Dow, propounded by NELSON.

Assumptions of Dow theory:a) The Market indices discounts everything.b) The market has 3 trends, namely:1. Primary Trend. (Major trend).2. Secondary Trend. (Intermediate trend).3. Minor Trend. (Short term trend).


STUDY OF VARIOUS TRENDS:

1. THE PRIMARY OR MAJOR TREND:

Dow compares the major trend to a TIDE, where a major uptrend is represented by patterns of rising peaks and troughs and a downtrend is characterized by lower peaks and troughs.

A MAJOR TREND LASTS FOR MORE THAN AN YEAR OR SEVERAL YEARS.


STUDY OF VARIOUS TRENDS:2. THE SECONDARY OR INTERMEDIATE TREND: DOW compares the intermediate trend to waves that makeup tides and they represents correction in the Primary trend.

AN INTERMEDIATE TREND GENERALLY LASTS FOR THREE WEEKS TO THREE MONTHS. THESE INTERMEDIARY CORRECTIONS GENERALLY RETRACES 1/3 OR 1/2 OR 2/3 OF THE PREVIOUS MOVE.


STUDY OF VARIOUS TRENDS:

3. THE MINOR OR SHORT TERM TREND:

DOW compares the minor or short term

trend to ripples on the waves. Minor

trend represents fluctuations in the

intermediate trends.

A MINOR TREND GENERALLY LASTS FOR LESS THAN THREE WEEKS.


FOCUS ON MAJOR TRENDS:FOCUS ON MAJOR TRENDS:

Dow suggests to focus on the big picture Dow suggests to focus on the big picture

i.e to focus on the MAJOR TREND.i.e to focus on the MAJOR TREND.

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

Namely:Namely:

a)a) ACCUMULATION PHASE.ACCUMULATION PHASE.

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

c)c) DISTRIBUTION PHASE.DISTRIBUTION PHASE.


VOLUME MUST CONFIRM THE TREND!!!

According to DOW, Volume must confirm

Uptrend by expanding as Price moves

Higher and diminishes with decrease in

Price.

In a Downtrend, Volume should expand as

Price drops and diminish as they rally.


E

FAILURE SWING:B

A

C

D

The rally at point B is higher than point A, but the rally at point C fails to exceed the previous rally at point B. This indicates reversal of uptrend and the point below the neck line i.e. D – E indicates a failure swing.


FAILURE SWING:C

B

E

DA

F

H

The rally at point B is higher than point A, and the rally at point C is higher than that of rally at point B; But it falls below D and few theorists sells at a break out Point below E.

While others would like to wait to see a lower high at point G to confirm the lower high as well as lower lows and then sell at a Point below H.

G


A trend is said to be at effect until it gives definite signals that it has reversed:

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

Various technical tools help the analyst to identify signals of trend reversals.

A trend before reversing, slows down and then changes direction.

Volume confirmation of a trends direction reversal is to be considered.


CRITICISMS OF DOW THEORY:

Dow theory generally misses 20% to 25% of a move before generating a signal.

Use of closing prices (Line charts).

Signals in Dow theory are generally generated during the second phase of the uptrend.

It was primarily used as an indicator of Economy which was substituted to stocks and other underlying assets.

Subjectivity and difficulty in distinguishing the various phases of trends.


Dow theory applied to Derivatives instrument:

Dow assumed most of the investors only trade major trend; Whereas in reality traders in futures market generally trend intermediate trend which was unimportant according to Dow’s assumption.

Minor Swings are more important than Major Swings.

Keeping in mind the above differences, Dow theory can be applied even to derivatives market.


CHART CONSTRUCTION:

Price and Volume data are generally studied by using graphical representations called charts.

Different types of charts include;

a) LINE CHARTS.

b) BAR CHARTS.

c) CANDLE STICKS.


Based on the investors time period, Daily or Weekly or Monthly charts can be used.

Arithmetic Vs Logarithmic Scale:

On an Arithmetic Scale, Price change shows an equal distance for each unit of price change whereas in an Logarithmic Scale, Price change shows an equal distance for equal percentage change.


OPEN INTEREST:

Open Interest is the total number of outstanding future contract that are held by the market participants at the end of the day.

Open interest is the number of outstanding contracts held by the longs or the shorts and not the total of the both.

Generally Volume and Open interests will be small at the early stages of futures contract life and expands as it reaches the maturity period and again drop during close to expiration stage.

For trading purpose, avoid stocks with lower volumes and lower open interest.


TREND ANALYSIS:

“ALWAYS TRADE IN THE DIRECTION OF THE TREND”

“TREND IS YOUR FRIEND”

“NEVER BUCK THE TREND”

It is the direction of the PEAKS and TROUGHS that constitutes market trend.

A Trend is simply the indicator of the direction of the market.


TYPES OF TREND:

AN UPTREND.

Series of successive higher peaks and troughs.

A DOWN TREND.

Series of declining peaks and troughs.

SIDEWAYS TREND.

Series of Horizontal peaks and troughs.


TREND STRATEGY:

In an Uptrend, go LONG (BULLISH).

In a Downtrend, go SHORT (BEARISH).

In a Sideways trend, DO NOTHING.

Trend is classified into 3 categories based on their time period:

a) Major Trend.

b) Intermediate Trend.

c) Minor Trend.


SUPPORT AND RESISTANCE:

SUPPORT:

It is an area or level on the chart where buying interest is sufficiently strong to overcome selling pressure i.e. Demand > Supply. In short, the troughs or reaction lows are called as Support.

For an Uptrend to continue, each successive lows, (Supports) must be greater than the preceding low.



RESISTANCE:

It is an area or level on the chart where Selling pressure is sufficiently strong enough to overcome buying interest i.e. Supply > Demand. In short, the peaks or reaction highs are called as Resistance.

For an Uptrend to continue, each successive highs, (Resistances) must be greater than the preceding highs.



CAUTION:

If the corrective dip in an uptrend comes all the way to previous low or breaches it, it is an early signal of reversal of a trend (downward move) or beginning of sideway movement.



BETTER CONFIRMATION:

More the trading that takes place in the Support or Resistance area, more significant it becomes.

Amount of time spent in the support or resistance area is a sign of better confirmation.

Volume also acts as a pivotal point in determination of better future prices and confirms better the support or resistance levels.



Support becomes resistance and vice versa if a Support level is penetrated (Broken out) with a significant margin and similarly in case of a break out of resistance levels.

In an uptrend, previous resistance levels which have been broken by a significant margin become supports.

In a downtrend, violated support levels becomes resistance levels on subsequent bounces.


TREND LINES: It is a simple but very valuable technical tool.

Uptrend:

It is a straight line drawn from left to right

along with every successive lows.

Downtrend:

It is a straight line drawn from right to left

along with every successive highs.

AN UPTREND OR A DOWNTREND SHALL BE

CONFIRMED BY JOINING OF ATLEAST

3POINTS.

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


TREND LINES: Trendline shall include all price action.

Trendline break on a closing basis is considered more valid than on intraday basis.

Valid trend line break is generally considered with a limit of 3% to 5% from the neckline.

Deciding the levels of tolerance is left to the risk levels of the investor.

A minimum 2day close below or above the trend line break is also generally considered.

Few of them even consider a weekly break of trend line as a valid signal.


FAN PRINCIPLE:

Sometimes after the violation of an uptrend line, prices will decline a bit before rallying back to the bottom of the old uptrend line, which is now acting as the resistance.

The breaking of the 3rd trend line in an UPTREND signals the reversal of the trend. Generally the broken trend line 1 and 2 becomes the Resistance levels.

The breaking of the 3rd trend line in a DOWNTREND signals the reversal of the trend. Generally the broken trend line 1 and 2 becomes the Support levels.


Steepness of the Trendline:

Generally most important trendlines approximate an average slope of 450.

Generally if trendlines are too steep or flat, it may not be an indication of a sustainable Trendline projections and the same shall not be trusted for.

Multiple trends like major, intermediate and short term are studied in tandem for a better picture.

Thus it is said, “Remember the Rembrandt” i.e. the big picture.


CHANNEL LINES:

Channel line also called as Return line is an area between two parallel lines i.e. the basic trendline and the channel line drawn parallel to the basic trendline.

Generally on an Upward trendline, supports form the basic trendline and the resistance the upper channel.

Confirmation of an existence of channel is proved by the price action within the two parallel lines.

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


CHANNEL LINES:

Once a breakout occurs from an existing price channel, prices usually travel a distance equal to the width of the channel from the point at which trend line is broken.

Out of the 2 trendlines constituting a channel, the basic trendline is by far the most important and reliable one.

The Channel line is a secondary use of the trendline technique.

The failure to reach the upper end of the channel line is an early warning that the lower line (Basic trend line) may be broken in the near future.


PERCENTAGE RETRACEMENT LINES:

After a particular move, Prices generally retrace a portion of the previous move, before resuming the trend in the original direction.

These counter trend moves are called as retracements and are generally to the extent of 50% of the previous move.

Besides 50% retracements, there are minimum (1/3) and maximum (2/3) retracements too.

Percentage retracements are applicable to all types of trends.


PERCENTAGE RETRACEMENT LINES:

If the prior trend is to be maintained, 66.67% or 2/3 retracement is a critical point not to be breached.

66.67% retracement is low risk area to buy in an uptrend or to sell on a downtrend.

If prices move beyond the 66.67% retracement, then the odds favour a trend reversal rather than just a retracement. The move in such situations usually retrace 100% of the previous trend.


SPEED RESISTANCE LINES:

It combines percentage retracements and trendline techniques.

This technique was developed by Edson Gould.

Speed lines measure the rate of ascent or descent of a trendline.

Speed lines are always drawn vertically in the opposite direction from the highest or the lowest point.



If an uptrend is in the process of correcting itself, the downside correction will usually stop at the higher speed line (2/3). If not prices will fall to the lower speed line (1/3). If the lower line is also broken then prices may move down to retrace 100% of the previous trend. Fall in prices below this point is a signal of reversal of the trend.

Incase of a downtrend, breaking of the lower lines is an indication of the prices rallying towards the upper line. If it is broken too then it is a signal of reversal of the trend.



Fibonacci lines are drawn in same as to speed lines, but at 38% and 62% levels.

Gann lines are also similar to speed resistance where the most important Gann line is drawn at 450 angle. Steeper Gann lines are drawn in an uptrend at 63.750 and 750 angle. Flatter Gann lines are drawn at 26.250 and 150

angles.


REVERSAL DAYS:

It should not be studied in isolation.

It should be considered along with other technical

indicators.

A Reversal day takes place either at the top or at the

bottom.

Wider the range for the day, and higher the volumes,

more significant is the trend reversal pattern.

Generally both the highs and lows on the reversal

days, exceed the range for the previous day.

(OUTSIDE DAY)


TOP REVERSAL DAY:

A Top Reversal Day is defined as setting of a

new high in an uptrend (Generally during the,

opening or early part of the day) and it is

followed by a lower close on the same day,

sometimes the close being below the lows of

the previous day close.


BOTTOM REVERSAL DAY:

A Bottom Reversal Day is defined as setting

of a new low in an down trend (Generally

during the, opening or early part of the day)

and it is followed by a higher close on the

same day, sometimes the close being higher

than the previous days close.


SIGNIFICANT REVERSAL DAYS:

REVERSAL DAYS ARE MORE KEENLY WATCHED ON WEEKLY AS WELL AS MONTHLY CHARTS.

CHARTISTS GIVE MORE SIGNIFICANCE TO WEEKLY CHART REVERSAL THANDAILY CHART REVERSAL AND MORE SIGNIFICANCE TO MONTHLY THAN WEEKLY.

VOLUME CONFIRMATION ON A REVERSAL DAY IS ALSO SEEN FOR BETTER PREDICTIONS.


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

place.

UPSIDE GAPS are gaps opened due to Open price being

greater than the previous days high and that upside gap

opened are not filled in during the day.

DOWN SIDE GAPS are gaps opened due to days high

price being below the previous days low.

Upside gaps are signs of Market strength whereas

Downside gaps are signs of market weakness.

Gaps on weekly and monthly charts are considered more

significant to that of gaps on a daily chart.


TYPES OF GAPS:TYPES OF GAPS:

BREAK AWAY GAPS.BREAK AWAY GAPS.

RUNAWAY GAPS.RUNAWAY GAPS.

EXHAUSTION GAPS.EXHAUSTION GAPS.


BREAKAWAY GAPS:

It usually occurs at the end of an important price pattern and signifies beginning of an important market move.

The breaking of an important RESISTANCE or SUPPORT through a breakaway gap is a solid confirmation of a beginning of a major and steep up move or a downward move.

Break away gaps usually occur with heavy volumes.

Break away gaps are generally not filled.

Break away gaps on the upside acts as an support and on a downtrend acts as resistance.


RUNAWAY GAPS:

It is also called as Measuring gaps which usually occurs at the midway of a major move.

It is a signal of markets moving effortlessly with comfortable volumes.

It signifies the continuation of the major move which started with the Breakaway gap.

It is also used to set up price targets.

Run away gaps are also not filled.

Run away gaps on the upside acts as an support and on a downtrend acts as resistance.


EXHAUSTION GAPS:

It usually occurs at the END of a major move.

An analyst should expect runaway gaps after break away and Exhaustion gap after Run away gaps.

It signifies the END of the major move which started with the Breakaway gap and continued with a Run away gap.

It is used to exit positions on the either side.

Exhaustion gaps are generally filled.

Exhaustion gaps on the upside or downside acts as the neckline and breach of the same is a strong signal of reversal.


ISLAND REVERSAL:

It occurs after an exhaustion gap, generally with a time period of 2 days or weeks.

An Exhaustion gap to the upside followed by a breakaway gap to the downside completes the ISLAND REVERSAL PATTERN and indicates reversal of trend.


CHART PATTERNS:

It is a formation that appears on a price chart that can be classified into different categories which have future predictive value.

Chart Patterns can be classified into 2 broad categories, namely:

a) Reversal Patterns.

b) Continuation Patterns.

Volume plays a very important role in confirming the above pattern formations and future predictions.


REVERSAL PATTERNS:

HEAD AND SHOULDER:

There shall exist a prior Uptrend before the formation of an Head and Shoulder pattern.

The peak of the head shall be higher than the peaks of the either shoulders.

Generally peaks are with heavy volumes and troughs with lighter volumes.

Generally rally into the newer highs is on lighter volumes in comparison with the previous highs rally.

Breach of neckline which forms the support line is important.


REVERSAL PATTERNS:

Breach of neckline is considered on the closing basis and not on intraday basis.

Volume should increase on the breaking of the neckline.

3% to 5% breach below the neckline is also considered for better confirmation.

Usually a Return move develops which is a bounce back to the bottom of the neckline (support) breached, now acting as a stiff Resistance.

If the initial breaking of the neckline is on heavy volumes, the probability of bounce back or the return move is less and vice versa.

After the breach of neckline, prices should not re-cross the neckline again, if crossed it is a failure pattern.


HEAD AND SHOULDER:

MEASURING IMPLICATIONS:

Price Objective is based on the Height of the Pattern.

The distance from the top of the head to the neckline (Vertical line) is the expected price downtrend from the point of breach of the neckline.

The above Price objective is a minimum target and the maximum price target might be the retracement of the full previous move. (100% RETRACEMENT OF PREVIOUS MOVE)

½ and 2/3 retracements of previous move can also be considered for the price targets to adjust.

Gaps, Previous trends break, Previous supports and resistances shall also be considered while fixing the price target.


INVERSE HEAD AND SHOULDER:

It is a mirror image of the Head and Shoulder top Pattern.

The volume from the head should see heavier volumes and a burst of volumes in breaking of the neckline.

Return move back to the neckline acting as support line is seen more often in a inverse pattern rather on top pattern.


INVERSE HEAD AND SHOULDER:

MEASURING IMPLICATIONS:

Price Objective is based on the Height of the Pattern.

The distance from the top of the inverted head to the neckline (Vertical line) is the expected price upside from the point of breach of the neckline.

The above Price objective is a minimum target and the maximum price target might be the retracement of the full previous move. (100% RETRACEMENT OF PREVIOUS MOVE)

½ and 2/3 retracements of previous move can also be considered for the price targets to adjust.

Gaps, Previous trends break, Previous supports and resistances shall also be considered while fixing the price target.


COMPLEX HEAD AND SHOULDER PATTERNS:

It is a variation of Head and Shoulder Pattern which are rarely found.

These are patterns where 2heads may appear along with a right and a left shoulder.

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

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

A lot of anticipatory buying takes place during the formation of the right shoulder and aggressive traders take positions before the confirmation of the pattern itself.

If the initial positions prove right, additional positions can be added at the breach of neckline.


CAUTION:CAUTION:

HEAD AND SHOULDER PATTERN CAN HEAD AND SHOULDER PATTERN CAN ALSO ACT AS A CONSOLIDATION ALSO ACT AS A CONSOLIDATION PATTERN, RATHER THAN REVERSAL PATTERN, RATHER THAN REVERSAL PATTERN.PATTERN.


TRIPLE TOPS AND BOTTOMS:

It is a slight variation of Head and Shoulder pattern which is very rare as a chart pattern.

The three Peaks or Troughs in the Triple Top or a Triple bottom formation is at the same level.

Volumes tend to decline with each successive peaks and increase at the breakout point.

The measuring technique and the return move is same as that of the Head and Shoulder Pattern.

A Triple bottom is a mirror image of triple top.

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


DOUBLE TOPS AND BOTTOMS:

It is a common reversal chart pattern found very frequently.

This pattern must have two peaks at about the same level.

Volumes is generally low on the second peak and picks up on the break of the neckline.

The measuring technique and the return move is same as that of the Head and Shoulder Pattern.

A Double bottom is a mirror image of double top.

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


DOUBLE TOPS AND BOTTOMS:

A double top is commonly referred to as “M” formation and a double bottom as “W” formation.

A normal pull back from a previous peak before the resumption of the uptrend should not be studied as Double top formation. (Till the breach of neckline, the double top formation is not complete)

The longer the time period between the peaks or bottoms and greater the height, more reliable is the chart pattern.

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


VARIATIONS FROM THE IDEAL PATTERNS:

Use of filters by traders to deal with variations in chart patterns.

On occasions the second peak will not reach the levels of first peak.

Most chartists want a close beyond the previous resistance on a closing basis and not on intra day basis.

Percentage penetration criteria of 3% to 5% is also considered.

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

A Friday close beyond the previous peak is also considered.


SAUCERS AND SPIKES:

It is also called as rounding bottoms.

It is a very slow and gradual turn from down to side ways and then to an uptrend.

Longer they last, more significant they are.

Spikes are “V” patterns that happens very quickly with little or no transition period.

They usually occur in markets which so over extended, that a sudden piece of adverse news will turn the trend abruptly without giving signals of slowing down or a turn in trend.

Volumes is the only tool that can help in predicting a “Spike”.


CONTINUATION PATTERNS:

It is an indication of a sideways price action, which is a pause in the prevailing trend and the next move will be in the same direction of the trend which preceded the formation.

Continuation patterns are generally of a shorter duration in comparison to that of reversal patterns.


TRIANGLES:

Triangle patterns are generally considered as Continuation patterns even though sometimes they act as Reversal Patterns.

There are 3 types of triangles, namely:

a) SYMMETRICAL TRIANGLES.

b) ASCENDING TRIANGLES.

c) DESCENDING TRIANGLES.


SYMMETRICAL TRIANGLES:

Symmetric Triangles are also called as “COILS”

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

The Vertical line measuring the height of the pattern is referred to as “BASE”. (AB)

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

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

B

A

C


ASCENDING TRIANGLES:

It is similar to that of a Symmetric Triangle with a rising lower line except for the flat or horizontal Upper line.

The Vertical line measuring the height of the pattern is referred to as “BASE”.

The point of intersection of the above 2 trend lines is called as the “APEX”.


This is generally a “Bullish Pattern”.

B

AC


DESCENDING TRIANGLES:

It is similar to that of a Symmetric Triangle with a declining Upper line except for the flat or horizontal Down line.

The Vertical line measuring the height of the pattern is referred to as “BASE”.

The point of intersection of the above 2 trend lines is called as the “APEX”.


This is generally a “Bearish Pattern”.

B

A

C


TRIANGLES:

A Symmetric triangle pattern is a continuation pattern which represents pause in the existing trend after which the previous trend continues.

The study of previous trend before the formation of a triangle is highly significant for accurate interpretation.

If the previous trend were to be an uptrend, the implications of symmetric triangle is bullish and if it were to be a down trend, it would have bearish implications.

A triangle should have minimum 4 reversal points i.e. each trend line must be touched at least twice. Few of them also have 6 reversal points.


MEASUREMENT OF TRIANGLES:

As a general rule prices should break out in the direction of the Prior Trend somewhere between 2/3 to 3/4 of the Horizontal width of the triangle.

Horizontal width is the distance between the BASE at the left of the pattern to the APEX at the right of the pattern.

If prices remain within the triangle beyond the 3/4 point, then the triangle loses its significance and prices may reach to the APEX point.

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

Return move is rarely found in Triangles, and the broken line acts as Support in an up trend and resistance in a down trend.


TRIANGLES:

Volume should diminish as the price swings narrow within the triangle.

Volume should pick up noticeably at the penetration point.

Measurement of symmetrical triangles are based on the Height of the BASE or by drawing a parallel line upward from the top of the BASE, parallel to the lower line.

B

A

C

D


VOLUME PATTERNS ON TRIANGLES:

In an Ascending Triangle pattern, volumes tend to increase on bounces and contracts on dips.

In a Descending Triangle, Volumes should be heavier on the downside and lighter during the bounces.

A Triangle is considered to be an intermediate continuation pattern which generally take a month to 3months for its formation.


BROADENING PATTERNS:

It is an inverted triangle or triangle turned backwards.

A Broadening pattern should not show a converging trend line Pattern.

Volume tend to behave the opposite way as to a triangle wherein it tends to expand along with the wider price swings.

It usually occurs at market tops which shows three successive higher peaks and two declining troughs.

The violation of the second trough completes the formation of the Broadening pattern.

An Expanding pattern is generally a bearish signal as it appears at the market top.


B

A

C

D

F

E

BROADENING PATTERNS:


FLAGS AND PENNANTS PATTERNS:

They represent brief pauses in Dynamic market moves.

It is preceded by a sharp or straight line move before its formation.

A Flag usually occurs after a sharp move and represent pause in the trend. The flag should slope against the trend.

Volume should dry up on the formation and burst on the breakout.

A Flag generally occurs near the midpoint of a move.



Both patterns are relatively short term and should be completed within 1 to 3 weeks.

It can also form on a down trend (Inverted flag and pennant) signifying continuation of the previous trend.

Both patterns occur about the midpoint of the previous up move or down move signifying half the previous way remaining from the breakout.

Both patterns take less time to form in a down trend.



A Pennant represents the formation of a small symmetric triangle preceded by a sharp up move.

Volume should be light on the formation and burst on the breakout.

A Pennant is identified by 2 Converging trend lines.


WEDGE FORMATION:

A Wedge is similar to that of a symmetric triangle both in terms of its shape and time except for its slant.

A Wedge usually lasts more than 1 month but not more than 3 months.

A Wedge has a noticeable slant either to the upside or the downside which is opposite to that of prior trend i.e. it slants against the previous trend. (Like flag pattern)

A Wedge can either be a falling Wedge or a raising Wedge.


WEDGE FORMATION:

A Falling Wedge is considered to be bullish and a raising wedge bearish.

Wedges often occur within the existing trend and are usually continuation patterns. However appearance of wedge at the top or bottom signifies reversal of the trend.

A raising wedge at the end of a top is an early signal of beginning of a down trend.

A falling wedge at the bottom signifies end of the bear trend.

Whether a Wedge appear at the middle or end of the move, the general rule of raising wedge is a bearish signal and a falling wedge is a bullish signal should be kept in mind.


B

A

C

D

F

E

FALLING WEDGE (BULLISH):

G


B

AC

D

F

E

RAISING WEDGE (BEARISH):


RECTANGLE FORMATION:

It is a continuation pattern, where price moves sideways in between two parallel horizontal lines.

Volume should be heavy on breakout.

Short term traders buy at the lower band of the rectangle and sell at the higher end.

Similar to that of a channel line except the trend is sideways.

Formation of a rectangle takes 1 to 3 months.

The height of the trading range can be used as a measuring yard to fix price target from the breakout point.


CONTINUATION H & S PATTERN:

If an Head and Shoulder pattern occurs on a down trend or an Inverted Head and Shoulder pattern on an uptrend, it is considered to be a continuation pattern instead of reversal pattern.

Prior trend before the formation of an head and shoulder pattern identifies whether it is a reversal or a continuation pattern.


VOLUME AND OPEN INTEREST:

Among the 3 indicators used in technical analysis, Price is always considered as the Primary indicator, whereas Volume and Open interest are considered to be secondary indicators.

Volume is the number of entities traded or exchanged hands in a particular time period.

Volumes are predominantly used in daily charts and weekly charts, but are very rarely used in monthly charts.

Volume precedes price and hence chartist consider it as an early signal of future Price Movements.


OPEN INTEREST:

Open Interest refers to the total number of outstanding or un liquidated contracts at the end of the day.

Open interest represents the total number of Outstanding longs or shorts contracts and not the total of the both.

One contract is represented by both buyer as well as seller.


CHANGES IN OPEN INTEREST:

BUYERBUYER SELLERSELLER CHANGECHANGE

1. Buys new 1. Buys new longlong

Sells new Sells new shortshort

INCREASESINCREASES

2. Buys new 2. Buys new longlong

Sells old longSells old long NO CHANGENO CHANGE

3. Buys old 3. Buys old shortshort

Sells new Sells new shortshort

NO CHANGENO CHANGE

4. Buys old 4. Buys old shortshort

Sells old longSells old long DECREASESDECREASES


OPEN INTEREST:

Thus if both participants in a trade are initiating a new position, the Open Interest will increase.

If both the participants are liquidating their old positions, the Open Interest will decline.

However if one is initiating a new position and an other liquidating his old position, there is no change in the open interest.


STUDY OF VOLUME AND OPEN INTEREST:

PRICEPRICE VOLUMEVOLUME OPEN OPEN INTERESTINTEREST

MARKETMARKET

RISINGRISING UPUP UPUP STRONGSTRONG

RISINGRISING DOWNDOWN DOWNDOWN WEAKWEAK

DECLININGDECLINING UPUP UPUP WEAKWEAK

DECLININGDECLINING DOWNDOWN DOWNDOWN STRONGSTRONG


On Balance Volume (OBV):

Developed and Popularized by Joseph Granville in 1963.

OBV is a curved line which confirms the continuation of the previous trend or warns the beginning of a reversal trend.

If Price and OBV lines converges, then it is a bullish pattern and divergence of these lines indicate reversal of the trend.


MONEY FLOW INDEX:

Developed and Popularized by Laszlo Birinyi.

It is a minor variation over OBV where the level of Volume on each price range is determined to know the money flow into and outside the stock.

If Price and MFI lines converges, then it is a bullish pattern and divergence of these lines indicate reversal of the trend.


MONEY FLOW INDEX:

Developed and Popularized by Laszlo Birinyi.

It is a minor variation over OBV where the level of Volume on each price range is determined to know the money flow into and outside the stock.

If Price and MFI lines converges, then it is a bullish pattern and divergence of these lines indicate reversal of the trend.

Calculation of Put - Call open interest ratio.


LONG TERM CHART ANALYSIS:

On the Weekly and Monthly charts, each bar represents one week and one months price action respectively.

The purpose of weekly and monthly charts is to compress the price action so as to expand the time horizon and to look at the bigger picture.

Followers of Random walk theory criticize the use of short term charts, whereas the long term charts are against the claim of random walk.


LONG TERM CHART ANALYSIS:

Interpretation of Price patterns on a Long term chart is same as that of a daily chart.

The practical approach to study of charts at different time periods should be from long term charts to short term charts. (Zeroing down Approach)

It is a policy of moving from Macro to Micro approach or moving big to small picture.

Long term charts should not be used for timing the market and for trading purposes.


INDICATORS INDICATORS

IN IN

CHART ANALYSISCHART ANALYSIS


1.1. OBV.OBV.

2.2. MFI.MFI.

3.3. MOVING AVERAGE.MOVING AVERAGE.

4.4. BOLLINGER BANDS.BOLLINGER BANDS.

5.5. 4 WEEK RULE.4 WEEK RULE.

6.6. OSCILLATORS.OSCILLATORS.

7.7. CCICCI

8.8. RSIRSI

9.9. STOCASTICSSTOCASTICS

10.10. MACDMACD

11.11. ACCUMULATION – DISTRIBUTIONACCUMULATION – DISTRIBUTION

12.12. ATR.ATR.

13.13. WILLIAMS % R.WILLIAMS % R.

14.14. WILLIAMS A/DWILLIAMS A/D

15.15. CHAIKIN OSCILLATORSCHAIKIN OSCILLATORS


MOVING MOVING AVERAGESAVERAGES


MOVING AVERAGES:

It is a simple trend analysis technique which averages out the prices for a particular period of time.

In short it is a Curving Trend line which helps in identifying the beginning of a new trend line or end of a old trend line.

It is only an indicator tool and not a leading tool. It only reacts and never anticipates.


MOVING AVERAGES:

Moving averages lag the market price action and smoothens the noise in price action.

Shorter term Moving Averages are more sensitive to price action in comparison to longer duration moving averages.

Moving averages can be Simple or Weighted or Exponential Moving averages.


MOVING AVERAGES:

When the Closing Prices move above the Moving Average, a Buy signal is generated and if it moves below the moving average, a Sell signal is generated.

A Shorter period Moving average gives an early signal in comparison to longer period average, it also generates lots of noise and whipsaws.

The longer average works better when the trend remains in motion and shorter averages work better when the trend is reversing.


MOVING AVERAGES:

Using 2 averages to generate signals is called as “Double Cross Over Technique”.

A Buy Signal is generated when the Shorter one crosses the longer one and vice-versa.

5 and 20days (Popular among future traders), 10 and 50 days (Popular among stock traders) moving averages are considered to be very popular cross over periods.

The double cross over technique produces lesser whipsaws in comparison to Single moving averages.


MOVING AVERAGES:

Using 3 averages to generate signals is called as “Triple Cross Over Technique”.

4-9-18 days moving averages are considered to be very popular Triple Cross over periods.

The shorter the moving average period, more closer they move towards the price. Thus in an uptrend, 4 day average should be higher than 9 day average, and 9 day higher than 18 day average and vice-versa in a down trend.


MOVING AVERAGES:

A buy signal alert is given when in an down trend, 4day crosses over 9day and it is confirmed when 9day crosses over 18days.

A Sell signal alert is given when in an Uptrend, 4day crosses down wards over 9day and it is confirmed when 9day crosses down wards over 18days.


MOVING AVERAGES:

Moving average works only incase of trending market and not incase of sideways market.

Moving averages can be used not only on Price but also on any technical data like Volume, Open interest etc.


BOLLINGER BOLLINGER BANDSBANDS


BOLLINGER BANDS:

Developed by John Bollinger.

Using Standard deviation, Upper and Lower bands are fixed above and below the moving average.

Prices are said to be overextended if they touch the upper band and are considered to be oversold if they touch the lower band.

Generally they are plotted around a 20 day moving average and standard deviation on the either side covers at around 95% of the price data.


BOLLINGER BANDS:

It is also used on Weekly charts so as to predict overbought and oversold situations.

The Upper band and the Lower band is used as Price Targets on the either sides and the 20day moving average as the neckline.

Bollinger band expands or contracts based on the last 20days volatility of the script.

If the distance between the upper and lower band narrows, it is an early signal of anticipated reversal in trend.

Bollinger Bands are never to be studied in isolation, instead to be studied along with other indicators.


4 WEEK RULE4 WEEK RULE


4 Week Rule:

It is used primarily for derivatives and commodity markets.

Cover Short positions and Buy long whenever Prices exceed the highs of the 4 preceding Calendar weeks.

Liquidate Long Positions and sell short whenever the Prices fall below the 4 preceding Calendar weeks.

According to this rule, the trader is always in the market either Long or Short.


4 Week Rule:

The above tool can be used without the aid of the computer.

It doesn’t catch the market tops or bottoms.

Weekly breakouts can be used as confirming signals for other technical indicators. (In particular for Moving averages)

The time period employed can be expanded or contracted based on the sensitivity and risk management levels.

1week or 2weeks low can be used as stop losses to exit previous longs.


OSCILLATORSOSCILLATORS


Oscillators:

They are extremely useful in trend less markets where other tools don’t work.

It helps the trader in recognizing the overbought or over sold situation.

It also helps the trader in understanding the trend which is loosing momentum i.e. trend nearing completion by displaying certain divergence.

Oscillator is only a secondary indicator which may be a subordinate to basic trend analysis.

Oscillators are extremely useful towards the end of a market move rather than at the beginning.


General Rules for Oscillators Interpretation:

Oscillators generally trade within a horizontal range or band and few oscillators also has a midpoint value, that divides the horizontal range into 2 equal half's.

When oscillators reach an extreme range either on the upper side or the lower side of the band, this suggests that the current price move has gone too far and is due for a correction.

The trader should buy when the Oscillator line is in the lower end of the band and selling in the Upper end.

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


Oscillators Use:

Oscillator is most useful when its value reaches an extreme reading on either side of the range.

The market is said to be overbought when it is near the upper extreme and over sold when it is near the lower extreme.

A divergence between the Oscillator and the Price when the Oscillator is in an extreme position is very significant.

The crossing of the midpoint line can give important trading signals in the direction of the Price trend.


Oscillators and Momentum:

The study of momentum is the basic study done in Oscillator analysis.

Momentum measures the VELOCITY of Price change as opposed to actual price change.

Market momentum is measured by continually taking the price differences for a fixed period of time. (10days)

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

Vx is the closing price x days ago.


Oscillators:

If the latest closing price is greater than that of 10days ago, a positive value above the Zero mark is plotted and vice-versa.

A shorter period Oscillator is more sensitive to that of a longer period one which is much smoother.

Momentum measures the acceleration or deceleration in the current advance or decline in the price trend.

The Momentum line leads the price action and gives an early signal for change in trend.


Oscillators:

Crossing of Zero line is considered as a trading signal where crossing above the zero line is a buy signal and below the zero line is a sell signal.

Oscillators signals should not be used against the basic price trend. i.e. buy positions should be initiated on crossing above the zero line only if the market trend is up and vice-versa.

Similarly Short positions should be initiated only if the crossing below the zero line is complemented with a basic down trend in prices.

AN OSCILLATOR IS A LEADING INDICATOR WHICH TURNS EARLY TO THAT OF THE PRICE LINE.


Oscillators:

The upper and lower boundary limits can be fixed based on the previous momentum history.

There are 3 types of Oscillators:

1. Momentum Oscillators. (V-Vx)

2. Rate of change Oscillators. (V/Vx)

3. Moving Average Oscillators. (Histogram)


COMMODITY CHANNEL INDEX:

CCI technique was developed by DONALD LAMBERT.

While constructing CCI, current price is compared with a moving average of selected time period. (Usually 5,10,20 and 40days)

While CCI was originally developed for Commodity trading, it is now a days popularly used for stocks.

CCI is a simple tool which indicates over bought or over sold market.


COMMODITY CHANNEL INDEX:

CCI is used as a timing tool which is best applied to securities that have cyclical movements.

CCI does not determine the length of the cycle, whereas it used to determine when the cycle begins or ends.

Reading over +100 is considered to be Over bought market and below -100 are considered to be Over sold market.

Study of divergence signal is also popular in CCI.


RELATIVE RELATIVE STRENGTH STRENGTH

INDEXINDEX


RELATIVE STRENGTH INDEX:

RSI technique was developed by J.Welles Wilder.

It is the most popular and trusted Oscillator tool used by most of the traders, which smoothens the noise found in most of the other Oscillator tools.

RSI = 100 – 100 / (1+RS)

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

14days is popularly used for the calculation of RSI and 14weeks in case of a Weekly chart being used. However variations of 14 days are also used. Shorter the time period, more sensitive the oscillator becomes and wider is its amplitude.



RSI works best at the extreme points of the band.

5,7 and 9 days are used as variations of the shorter time period RSI and 21 or 28 days is used for the longer time duration.

The 14 days RSI becomes Over bought above 70 and oversold below 30.

The study of chart patterns are equally applicable to even RSI as they are drawn to regular price charts.

RSI – PRICE Divergence:

If prices are rising or flat and RSI is decreasing, look for turn down in prices. If prices are declining or flat and RSI is increasing, expect prices to move higher.



FAILURE SWINGS:

A Top failure swing occurs when the RSindex rises above 70, declines to a lower level (fail point), raises again from that level attempting to break the previous high, but falls below the fall point, it is a Bearish sign.

A Bottom failure swing occurs when the RSindex falls below 30, recovers and again falls attempting to break the previous low, but fails and breaks the Fall point, it is a Bullish sign.


Negative Divergence:Negative Divergence:


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


Top Failure Swing:Top Failure Swing:


Bottom Failure Swing:Bottom Failure Swing:


STOCHASTICSSTOCHASTICS


STOCHASTICS:

It is based on the observation that as price increases, closing price will be closer to day’s high on an uptrend and on a downtrend, closing price will be closer to day’s low.

%K line and %D line are the two lines used in Stochastics.

Stochastic observes where the most recent closing price is in relation to the price range for a chosen time period. (14days is generally used)


STOCHASTICS:

%K = 100[(C – Lx) / (Hx – Lx)]

where:

C = Latest closing price.

Lx= Lowest close for the last “X” days.

Hx= Highest close for the last “X” days.

The above formula measures the % of closing price in relation to the total price range for the selected time period.

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

3 period moving average of %D gives Slow Stochastics


STOCHASTICS:

Most traders use Slow Stochastic to avoid too much noise and to have a smooth curve.

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

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

Buy when the %K line rises above the %D line and sell when the %K line falls below the %D line. Crossovers above the upper band (80) and below

the lower band (20) are more powerful than within the band.


STOCHASTICS:

Failure swing applied in RSI can also be applied for interpreting Stochastic.

Negative Divergence between Stochastics and Price can also be interpreted as done in case of RSI.

Weekly Stochastics is used to forecast the market direction and daily Stochastics can be used for timing the market.

Stochastics are also popularly used on intra day charts for effective day trading.

RSI and Stochastics both confirming a particular signal is very strong.


Negative Divergence:Negative Divergence:


MOVING AVERAGE MOVING AVERAGE CONVERGENCE AND CONVERGENCE AND

DIVERGENCEDIVERGENCE(MACD)(MACD)


MACD:

MACD was developed by Gerald Appel.

It combines Oscillator technique with that of Dual Moving average cross over approach.

The faster line called the MACD line is the difference between the 2 exponentially smoothed moving average of the closing prices (Usually 12 and 26 days).

The slower line called the Signal line is usually a 9 period exponentially smoothed average of MACD line.

(12-26-9)


MACD:

The crossing over of the faster MACD line above the slower signal line is a BUY SIGNAL.

A crossing over of the faster line below the slower line is a SELL SIGNAL.

MACD line resembles an OSCILLATOR by fluctuating between above and below zero line.

An overbought situation exists when the lines are too far above the zero line and over sold situation when the lines are too far below the zero line.


ACCUMULATION ACCUMULATION - -

DISTRIBUTIONDISTRIBUTION


Accumulation-Distribution Pattern:

It is a variation of On balancing Volume which attempts to confirm changes in prices by comparing the volumes associated with it.

It is a momentum indicator which associates changes in Price and Volume.

The indicator is based on the premise that more the volume that accompanies a price move, more significant is the move.



Σ {(C - L) – (H – C)} * Volume

(H – L)Where:

C = Close.

L = Low.

H = High.

The nearer the close is to the high’s of the day, more volume is added to the cumulative total and vice-versa.

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



When security is being accumulated, the A/D moves up and when the security is being distributed, the A/D moves downwards.

When a Negative Divergence occurs between Price and A/D pattern, Price will usually change to confirm the A/D.


AVERAGE AVERAGE TRUE RANGETRUE RANGE


AVERAGE TRUE RANGE:

It is a measure of Volatility introduced by Welles Welder.

The True Range indicator is the greatest of the following:

a) The distance between today’s high and today’s low.

b) The distance between Yesterday’s close to today’s high.

c) The distance between Yesterday’s close to today’s low.

The Average True Range is the 14 day moving average of the true ranges.


AVERAGE TRUE RANGE:

High ATR values suggests market bottoms following a Panic selling. (BULLISH)

Low ATR values suggests long sideways period and signals of market topping.

As prices bottom, Volatility is very high.

Low Volatility generally accompanies consolidation phase before the prices break out.


Topping of ATR suggesting market bottoming Topping of ATR suggesting market bottoming


WILLIAMS % “R”WILLIAMS % “R”


WILLIAMS %”R”:

It is a Momentum indicator introduced by Larry Williams.

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

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

The interpretation of Williams %R is very similar to that of a Stochastic.

Reading over 80 or below 20 indicate the market extremes of overbought or oversold situations.

It is wise to sell after price starts turning down, rather than simply selling because it is overbought. %R may remain at overbought situations for an extended period when price still continues its upward move.


WILLIAMS %”R”:

%R is a strong leading indicator which forms a peak and turns down a few day before the security price peaks and turns down.

Similarly %R usually creates a bottom and turns up few days before the security price turns up.

William %R popularly uses 14 days time period.

5-10-20-28-56 are also popularly used as variations to 14 days time period.


WILLIAMS WILLIAMS ACCUMULATION AND ACCUMULATION AND

DISTRIBUTIONDISTRIBUTION


WILLIAMS ACCUMULATION-DISTRIBUTION:

Accumulation indicates market controlled by buyers and Distribution indicates markets controlled by sellers.

How to Calculate?

STEP-1:

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

“TRH” and “TRL”.

TRH = Yesterday’s close or today’s high which

ever is Greater.

TRL = Yesterday’s close or today’s low which ever

is Lower.



STEP-2:

1) If today’s close is greater than yesterday’s close:

Today’s W A/D = Today’s close – TRL.

2) If today’s close is less than yesterday’s close:

Today’s W A/D = Today’s close – TRH.

3) If today’s close is equal to yesterday’s close:

Today’s W A/D = 0

THE WILLIAMS ACCUMULATION-DISTRIBUTION IS THE

CUMULATIVE TOTAL OF THESE VALUES i.e. today’s

A/D + (1) OR – (2) OR 0 (3) Yesterday’s cumulative A/D.



Distribution of security is indicated by security making a new high and the William A/D indicator failing to make a new high. {Bearish Signal} (Top Failure Swing)

Accumulation of security is indicated by security making a new low and the William A/D indicator failing to make a new low. {Bullish Signal} (Bottom Failure Swing)


Bearish SignalBearish Signal


CHAIKIN OSCILLATORCHAIKIN OSCILLATOR


CHAIKIN OSCILLATOR:

Inspired by the works of Joe Granville on OBV and Williams on Accumulation and Distribution, Marc Chaikin developed a moving average oscillator.

The Chaikin Oscillator is created by subtracting a 10 period exponential moving average of the Accumulation – Distribution line from a 3 period exponential moving average of the accumulation – distribution line.

If a stock closes above its midpoint (high + close) / 2 for the day, then there was an accumulation on that particular day and if stock closes below its midpoint for the day, there was a distribution for that particular day.


CHAIKIN OSCILLATOR:

Volume is considered as the fuel which powers a healthy rally. Thus accumulation should be supported by heavy volumes and distribution by low volumes in an uptrend and vice-versa.

A Bearish divergence occurs when Prices move to newer highs and the oscillator flattens or declines.

A Bullish divergence occurs when Prices decline and creates a newer low and the oscillator flattens or moves higher.


Bullish Divergence:Bullish Divergence:


ELLIOTT THEORYELLIOTT THEORY


ELLIOTT THEORY:

Proposed by Ralph Nelson Elliott, Wave theory was improvised by Charles J Collins.

Elliot was very much influenced by the Dow theory.

Through constant observations and nature of markets, Elliott concluded that the movements of stocks can be predicted by observing repetitive patterns of waves.

There are 3 basic tenants of Elliott wave theory:

a) Pattern.

b)Ratio.

c) Time.


ELLIOTT THEORY:

Patterns represents the Wave Formation that comprises the most important element of the theory.

Ratios determine the Retracement Points and the Price Objectives by measuring the relationship between different waves.

Time relationships even though considered less significant are used to confirm the Patterns and Ratios.

In its most basic form, the theory says that the stock market follows a repetitive rhythm of a 5 Wave advance followed by a 3 Wave decline.

One complete cycle has 8 Waves of which 5 are advancing and 3 declining.


ELLIOTT THEORY:

Waves 1, 3 and 5 are called Rising or Impulsive Waves and Waves 2 and 4 are called Declining Waves.

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

The Basic Pattern:

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

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


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


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


a1

3

2

4

5

THE BASIC PATTERN:

b

c

0


ELLIOTT THEORY:

Each larger Wave can be further sub-divided into smaller waves which follows the Fibonacci series.

The Fibonacci series 1,2,3,5,8,13,21,34,55,89,144,…..

Whether a given wave is divided into 5 or 3 is determined by the direction of the next larger wave.

Declining Waves moving against the trend (2 and 4) are subdivided only into 3 waves whereas the corrective waves a and c are subdivided into 5 waves.

Corrective waves (a) and (C) are moving in the same direction as the next larger wave 2, and hence are breakdown into 5 waves, whereas Wave (b) by comparison has only 3 waves since it is moving against the next larger wave 2.


ELLIOTT THEORY:

It is of great importance to determine the difference between groups of 3 and 5 waves, in application of Elliott Theory to forecast the future.

A completed 5 wave move is only a completion of one of the parts of larger wave and there is more upside left unless it is 5th of 5th larger wave.

A Correction can never take place in 5 Waves, it is always of 3 Waves.

In a Bull Market if a 5 wave decline is seen, it may probably be the 1st wave of the 3 Wave (a,b,c) decline and there may be more declines to come in future.

In a Bear Market a 3 wave advance should be followed by resumption of a downtrend.


ELLIOTT THEORY:

Corrective Waves are less clearly defined and are very difficult to identify / predict.

Corrective Waves are always of 3 Waves and it can never take place in 5 Waves. (With an exception of Triangle)

Corrective Waves are classified into 3types:

1. Zig-Zags.

2. Flats.

3. Triangles.


ELLIOTT THEORY:

ZIG ZAGS:

A Zig Zag is a 3 Wave Corrective Pattern against the major trend which breaks down into a 5-3-5 sequence.

Middle Wave B, falls short of the beginning of Wave A and Wave C moves well beyond the end of Wave A.

Bull Market Zig Zag (5-3-5)


ELLIOTT THEORY:

ZIG ZAGS:

Bear Market Zig Zag (5-3-5)


ELLIOTT THEORY:

ZIG ZAGS:

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

It is a less common variation of Zig Zag which sometime

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

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

Pattern.


ELLIOTT THEORY:

FLATS:

A Flat Pattern follows a 3-3-5 Pattern. Wave a is a 3 pattern wave unlike 5 incase of Zig-Zag.

Flat is more of a consolidation phase rather than correction phase. It is a sign of strength in a Bull Market.

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


ELLIOTT THEORY:

FLATS:

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


ELLIOTT THEORY:

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

Triangles usually occur in the fourth wave and precede the final move in the direction of the major trend.

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

Triangles are both Bullish and Bearish in an uptrend since they indicate resumption of an uptrend and also indicate that after an another wave up, prices will correct.

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


ELLIOTT THEORY:

TRIANGLES:

Triangles are usually continuation pattern that break downs into patterns of 5 waves, each wave having 3 waves of its own.

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

a) Ascending Triangles.

b) Descending Triangles.

c) Symmetric Triangles.

d) Expanding Triangles. (Broadening Pattern)

Price Objective incase of triangles is measured based on the height of the triangle formed from the base.


ELLIOTT THEORY:

The rule of Channel lines studied earlier helps in identifying the wave counts at the point of breach of channel line.

Wave 4 in a previous bull market shall be considered as the strong support area in subsequent bear markets.

After the end of Bull market with 5 up waves and beginning of Bear market, the markets generally will not move below the 4th wave of the previous up move. It helps to identify the bottom of the bear market.


ELLIOTT THEORY:

Fibonacci Numbers for Ratio’s:

The following series of Fibonacci numbers 1,2,3,5,8,13,21,34,55,89,144…… as the following salient features:

a) The sum of any 2 consecutive numbers equals the next highest number.

b) The ratio of any number to its next higher number approximates to 0.618.

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

d) The ratio of alternate number approaches to 2.618 or its inverse 0.382.



One of the Impulsive waves sometimes extend and the other two waves are equal in magnitude and time. i.e. if wave 5 extends, wave 1 and 3 should be about equal and if wave 3 extends, wave 1 and 5 should be about equal.

A Minimum target for top of Wave 3 can be obtained by multiplying the length of wave 1 by 1.618 to the bottom of Wave 2.

The Top of Wave 5 can be approximated by multiplying Wave 1 by 3.236 (2 * 1.618) and adding that value to the top or bottom of wave 1 to obtain maximum and minimum targets.



Where Wave 1 and 3 are of about equal, and Wave 5 is expected to extend, Price Objective for Wave 5 is the distance between the bottom of wave 1 to top of wave 3, multiplied by 1.618 from bottom of wave 4.

For Corrective Waves, in a normal 5-3-5 Zig-Zag correction, Wave C is often about equal to the length of Wave A or multiply 0.618 by the length of Wave A and subtract that result from bottom of Wave A to get the possible length of wave C.

Incase of flat 3-3-5 correction, where Wave B reaches or exceeds the top of Wave A, Wave C will be about 1.618 the length of Wave A.

In a symmetric triangle, each Wave is to its previous wave by about 0.618.


Fibonacci Percentage Retracements:

The most commonly used percentage retracements are 61.8%, 38% and 50%.

In a strong trend, a minimum retracement is usually around 38% and in a weak trend, the maximum retracement is around 62%. (Retracements are measured from bottom of an uptrend to the top of an uptrend and vice-versa)


Fibonacci Time Targets:

It is considered to be least important of the three being Price, Ratios and time.

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

Fibonacci time targets are found by counting forward from significant tops or bottoms.

Trader counts from the top or bottom the number of trading days for future top or bottom to occur on Fibonacci days i.e. 13,21,34,55 or 89th trading day.

The above time targets are used on all types of charts namely Daily, Weekly and monthly charts.

Fibonacci time targets can be taken from top to top, top to bottom, bottom to top and bottom to bottom. But however the above targets can be found only after the fact.


Elliot Wave Summary:

A complete Bull Market cycle is made up of 8 Waves, 5 Up Waves followed by 3 Down Waves.

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

Correction always takes place in 3 Waves.

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

Triangles are usually 4th Wave or Wave B.

Sometimes one of the impulsive waves extend and the other two will be of time and magnitude.

The number of Waves follow the Fibonacci sequence.

Fibonacci ratios and retracements are used to find out Price Objectives.


Elliot Wave Summary:

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

Bear markets should not fall below the bottom of the previous 4th Wave.

The theory was originally applied to Stock Market averages and does not work as well incase of individual stocks.

Elliot works very well in case of those markets which are highly liquid and followed by large number of investors and traders.

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


CANDLE STICKSCANDLE STICKS


BAR CHARTS VS CANDLE STICKS

Candle charts pictorially displays the Supply and Demand function by showing who is winning the battle between Bulls and Bears.

Candle Sticks not only reveal the trend but also the force or lack of force behind the trend.

Candle Stick charts indicate early signals of reversal in comparison to that of Bar Charts.

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


BAR CHARTS VS CANDLE STICKS

Studies market psychology much faster and easier than bar charts. A candles extended real body demonstrate definite bullishness or bearishness. However a small real body indicates indecision or a tug of war between the bulls and the bears with no definite winner.


INTRODUCTION

Candle Sticks predict the strong psychology of the markets, its emotions and future expectations.

“What is important in market fluctuations are not the events themselves, but the HUMAN REACTIONS to these events”.


INTRODUCTION

The use of Candle Stick charts originated in JAPAN when RICE was the medium of exchange.

Munehisa Homma is considered as the father of Candle Sticks.

“NEVER PLACE A TRADE WITH A CANDLE SIGNAL WITHOUT CONSIDERING THE RISK-REWARD RATIO OF THE POTENT TRADE”


LIMITATIONS

They need a Close to confirm the Candle Signal.

They don’t give PRICE TARGETS.Candle Patterns cannot be used in isolation

to effect trades.Cannot be used on tick charts.


DEFINTIONSREAL BODY:

It is the rectangle portion of the Candle that represents the range between the Opening and Closing Price.

WHITE (GREEN) REAL BODY:

It represents Close being higher than Open.BLACK (RED) REAL BODY:

It represents Close being lower than Open.


DEFINTIONSSHADOW:

It is the Vertical line that extends above and below the real body called as Upper and Lower Shadows.

The Top of the Upper shadow is the sessions high and the Bottom being the sessions low.


DEFINTIONS SHAVEN HEAD AND BOTTOM:

If the Close is at the High’s of the session, it has no upper shadow and hence it has a “Shaven Head”.

If the Close is at the Low’s of the session, it has no lower shadow and hence it has a “Shaven Bottom”.The top of the upper shadow and the bottom of the lower shadow represents the high’s and low’s of the session, whether the real body is White (Green) or Black (Red).


TIME FRAMELike BARS, each CANDLE represents

action for a specific time frame. On a daily chart, each candle represents price action for a day, on a weekly chart for a week and on a 15 minute intra day chart, a 15 minute unit of time.

A Long body (either Green or Red) indicate strong market participation, whereas a Small body indicates no market participation.


SIGNALSEXAMPLE OF A CANDLEA Long White real body indicate, extremely

POSITIVE or BULLISH sentiments as the close is many points above its open and near to its day high.

A Long Red real body indicate, extremely NEGATIVE or BEARISH sentiments as the close is many points below its open and near to its day low.


SIGNALSThe upper shadow indicates that the

day’s high could not be maintained by the Bull’s because of selling pressure at higher levels or lack of buying interest at higher levels.

The lower shadow indicates that the Buying came at lower levels to support the stock price not to go further below.


SIGNALSThey believe that the first

hour of the day sets the tone of the day’s market.

“It is said that the amateur opens the market and the professional closes it”.


MARKET STRATEGIES


MARKET STRATEGIES Trend change or Reversal signal represents

the transformation in market psychology and an investor should trade accordingly.

As the popular saying, ”TREND IS YOUR FRIEND AND ALWAYS GO ALONG WITH IT’.

On Charts, Western trend reversal patterns include Double tops/bottoms, Triple tops/bottoms, Head and Shoulder, Island tops and bottoms, Cup and Saucers etc.


MARKET STRATEGIESA Reversal signal should be used to

initiate a new position only if that signal is in the direction of the major trend.

Consider a Stock moving in a strong uptrend, and then it either consolidates sideways or moves downwards to retracement levels, and at this time if a BULLISH CANDLE signal appears, fresh Long Positions can be initiated.


MARKET STRATEGIESA Bullish Candle signal in a bear trend

should be used to either cover short or as an alert that the markets may rally and to use that rally to sell since the major trend is down.

A trend reversal signal may indicate continuation of the previous trend or reversal of the previous trend.


TREND REVERSALS

In figure 1, trend resumes after retracement, whereas in figure 2, trend breaks down.

FIGURE 1 FIGURE 2


SUPPORTS AND RESISTANCES Identification of Support and Resistance

levels are very important. It may be a Prior high or low, trend line,

Moving average or most recent high or low.

If a Bullish Candle appears at the Support, it increases the potential of the uptrend to resume, whereas a Bearish candle at the Resistance increases the potential for the downtrend to begin.


SUPPORTS AND RESISTANCESThe Previous Supports may now act as

New Resistances and Previous Resistance now as New Support.

A break of Support or Resistance on a Closing Basis is considered more important than on an Intra day basis.

A sideways trend in Japanese terminology is called as BOX Range. Close of real body above or below the range is of vital importance.


STUDY OF SINGLE CANDLESSPINNING TOPS:

It refers to a Candle (either Green or Red) with a Small Real Body. Spinning Tops may have Upper and Lower Shadows or none at all.

A Spinning Top indicate that Bulls and Bears are battling it out in a tug of war with neither the bulls nor bears being able to take dominant control.


STUDY OF SINGLE CANDLES

SPINNING TOPS:


STUDY OF SINGLE CANDLESHIGH WAVE CANDLES:

They also have diminutive real body (either green or red) like spinning top but also longer upper and lower shadows. The Upper and Lower shadows need not be of same size, but should be substantially long. High wave candles indicate outright CONFUSION in the minds of bulls and bears.


STUDY OF SINGLE CANDLES

HIGH WAVE CANDLES:


TREND ANALYSIS THRU SPINNING TOPS AND HIGH WAVE CANDLES

UPTREND: In an Uptrend supported by long green real

body, small real body (either green or red) exerts caution on the long side.

Spinning tops are warnings not to follow this market on the long side and are more powerful in a market which are becoming over extended and are nearing resistance levels. A trend shift or reversal may be in the offering.



SIDEWAYS TREND: In a Sideways trend or a Box Range,

Spinning Tops and High Wave candles have no implications of trend reversal or shift. It indicates markets simply resting before it breaks up or down from the price range.



DOWN TREND: In an Down trend supported by long red real

body, small real body (either green or red) exerts caution on the short side.

Spinning tops are warnings not to follow this market on the short side and are more powerful in a market which are becoming over sold and are nearing Support levels. A trend shift or reversal may be in the offering.


HAMMER AND HANGING MAN The Hammer and Hanging man candles

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

An HAMMER appears on a down trend at or near the bottom which suggests that the market is hammering out a base.

An HANGING MAN appears on an uptrend at or near the top which suggests that the market is creating a top. One must wait for a close under the Hanging man’s real body before becoming BEARISH.


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

the Hanging man. A Shooting Star displays a long upper shadow and its small real body is at or near the lows of the session.

A Shooting Star shows trouble overhead. Because of the Shooting Stars long bearish upper shadow, we don’t need any confirmation like the Hanging man.

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


HAMMER, HANGING MAN AND SHOOTING STAR


EASY INTERPRETATION“FEEL BULLISH WITH A

HAMMER AFTER A FALLING MARKET AND BEARISH AFTER A RISING MARKET”.


THE DANGEROUS DOJIThe DOJI is a session in which the

Opening and Closing prices are the same. It resembles a Cross.

Like a Spinning Top, Doji indicate a market in complete balance between Supply and Demand.

Doji represents market at a juncture of indecision and it can be an early warning that the preceding rally is losing steam.


THE DANGEROUS DOJIDoji’s are extremely powerful in calling

market tops, (especially after a long white candle) but however sometimes lose signal in calling the market bottoms.

A close over the Doji’s high is a signal that bulls have regained strength.

The Doji’s are more powerful when they occur rarely compare to its past history on a particular chart.


THE DANGEROUS DOJI The Doji’s are named based on the placement

of open and close prices of the session. THE DRAGON FLY DOJI:

It forms with the Open and Close near or at the high’s of the candle. This candle signal’s bullish implications. It resembles a Hammer without a real body.

Doji’s are generally not important at the declines, but however Dragon Fly is an exception. In a oversold market, Dragon fly Doji is a bullish signal.


THE DANGEROUS DOJI THE GRAVE STONE DOJI:

It is the bearish counter part to the Dragon fly Doji. The Grave Stone Doji’s Open, Close and low resides at the bottom of the candle.

Grave Stone Doji’s are extremely powerful in calling top reversals. If a Grave stone Doji appears on a market top and the next candle falls to the downside, it confirms the earlier Doji’s Signal of market topping.


THE DANGEROUS DOJI Doji’s with longer upper and lower

shadows are called as Long Legged Doji’s. A Doji appearing on a rally is called as

Northern Doji and that on a decline is called Southern Doji.

Doji’s give better signal when taken in the context of a prior trend, when they confirm other technical indicators or patterns and during consideration of follow through action.


TYPES OF DOJI’S

Technical Analysis Rudramurthy

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