PROJECT REPORT ------------------- ( Technical Techn ical Analysis ) ----------
(Submitted in Partial Fulfillment of the Award of the Degree o f Master in Management Studies of University of Mumbai)
Submitted by
(Lokesh Oswal) Roll No. 162
UNDER THE GUIDANCE OF (Dr. Kaustubh Sontakke)
MMS 2011-13 PILLAI INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH, NEW PANVEL
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DECLARATION
I, Mr. Lokesh Oswal of Pillai‟s Institute of Management Studies and Research hereby declare that the Pro ject Work titled “Commodity Market” submitted as part of my curriculum cu rriculum of MMS degree is the original work done by me the project has not formed the basis for an award of any degree, associate ship, fellowship or any similar titles.
Signature of the student
(Lokesh Oswal)
Place: Date:
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COMPANY CERTIFICATE
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CERTIFICATE
This is to certify that the Project Work titled “Technical Analysis” is a bonafide work of Mr. Lokesh Oswal carried out in partial fulfillment for the award of degree of MMS under my guidance. This project work is original and not submitted earlier for the award of any degree/ diploma of this or any other University/ Institution.
Name of the Guide
Director
Dr. Kaustubh Sontakke
Place:
Date:
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ACKNOWLEDGEMENT
If words are considered as a symbol of approval and token of appreciation then let the words play the heralding role expressing my gratitude.
I got an opportunity to understand the capital market at Edelweiss financial ltd. While training I learnt many things about capital market and its structure. So I am very thankful to Edelweiss financial ltd for giving me such opportunity.
Also I would like to acknowledge my deepest sense of gratitude all my faculty members and Mentor (Dr. Kaustubh Sontakke) under whose guidance I was able to complete my project.
Date
Signature of Student
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TABLE OF CONTENTS
S.NO.
PARTICULARS
PAGE NO.
1 2 3 4 5 6 7 8 9 10 11
Introduction Company Profile Technical analysis Drawbacks / limitations of technical analysis Tools & Instruments in technical analysis Trends In Technical Analysis Why Volume Is Important Chart Patterns Technical analysis of Stock “Power Grid” Conclusion Bibliography
07 09 11 12 14 27 34 35 46 59 60
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INTRODUCTION :-
WHAT’S THIS EQUITY ANALYSIS?
Professional investor will make more money & less loss than, who let their heart rule. Their head eliminate all emotions for decision making. Be ruthless & calculating, you are out to make money. Decision should be based on actual movement of share price measured both in money & percentage term & nothing else. Greed must be avoided Patience may be a virtue, but impatience can frequently be profitable. In Equity Analysis anticipated growth, calculations are based on considered FACTS & not on HOPE. Equity analysis is basically a combination of two independent analyses, namely fundamental analysis & Technical analysis. The subject of Equity analysis, i.e. the attempt to determine future share price movement & its reliability by references to historical data is a vast one, covering many aspect from the calculating various FINANCIAL RATIOS, plotting of CHARTS to extremely sophisticated indicators. A general investor can apply the principles by using the simplest of tools: pocket calculator, pencil, ruler, chart paper & your cautious mind, watchful attention. It should be pointed out that, this equity analysis does not discuss how to buy & sell shares, but does discuss a method which enables the investor to arrive at buying & selling decision. The financial analysts always need yardsticks to evaluate the efficiency & performances of any business unit at the time of investment. Fundamental analysis is useful in long term investment decision. In Fundamental analysis a company‟s goodwill, its performances, liquidity, leverage, turnover, profitability & financial health was checked & analysis with the help of ratio analysis for the purpose of long term successful investment. Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term price travels. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to the late 19th century.
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Assumptions for the Equity Analysis.
1. Works only in normal share-market conditions with great reliability, it also works in abnormal share-market conditions, but with low reliability. 2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY , so the investment object has vital importance associated to return along with risk. 3. Cash management gets the magnitude role, because the scenario of equity analysis is revolving around the term money 4. Portfolio management, risk management was up to the investor s knowledge. 5. Capital market trend is always a friend, whether it is short run or long run. 6. You are buying stock & not companies, so don t are curious or panic to do Post-mortem of companies performances. 7. History repeats: investors & speculators react the same way to the same types of events homogeneously. 8. Capital market has a typical market psychology along with other issues like; perceptions, the crowd Vc the individual, tradition s & trust. 9. An individual perceptions about the investment return & associated risk may differ from individual to individual. 10. Although the equity analysis is art as well as sciences so, it also has some ex ceptions.
EQUITY ANALYSIS.
ENVIRONMENT & ECONOMICAL ANALYSIS.
FUNDAMENTAL ANALYSIS
TECHNICAL ANALYSIS
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Company Profile
Edelweiss is one of India's leading Financial Services Groups, with operations that span more than forty different lines of business and subsidiaries.
Mission
To be the most preferred financial hub for wealth creation Vision To figure among the top Five Financial Powerhouses in India in next five years
Management
Mr. Rashesh Shah, Chairman & CEO Mr. Venkat Ramaswamy, Executive Director Mr. Himanshu Kaji, Executive Director Mr. Narendra Jhaveri, Independent Director Mr. Kunnasagaran Chinniah, Non-Executive Director Mr. P N Venkatachalam, Independent Director Mr. Berjis Desai, Independent Director Mr. Sanjiv Misra, Independent Director Mr. Sunil Mitra, Independent Director Their operations straddle the entire spectrum of financial services in the wholesale and retail market segments including Asset Management, Capital Markets, Credit, Housing Finance and Insurance services. India‟s growth story is driven by a savings rate of about 32%, one of the youngest populations in the world and strong domestic consumption.
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With a net worth of over INR 28 B, Edelweiss is adequately capitalized to exploit the opportunities emerging from this robust economic growth. Edelweiss employs over 2900 professionals across 297 offices and branches spread across 144 cities of India. Their core philosophy of „Ideas create, values protect‟ is translated into an approach that is led by entrepreneurship and creativity, and protected by intellectual rigor, research and analysis. Services and Products Broking :
Equities Broking Derivatives Broking o Commodities Broking o Currency Broking o Depository : Shares o Commodities o Distribution : IPO‟s o Bonds , Fixed Deposit , o NCD‟s
Research :
Technical Fundamental o Asset Management :
o
Corporate Office: Capital
o
Alternative Asset Advisory
Pvt.
Ltd.
14th Floor, Express Towers, 37-40, Nariman Point , Mumbai:- 400021. Tel: (91-22) 22864400 Website:- www.edelweissfin.com
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Technical analysis :-
“Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements.”
Technical analysis mainly seeks to predict the short term price travels. It is important criteria for selecting the company to invest. It also provides the base for decision-making in investment. The one of the most frequently used yardstick to check & analyze underlying price progress. For that matter a verity of tools was consider. This Technical analysis is helpful to general investor in many ways. It provides important & vital information regarding the current price position of the company. Technical analysis involves the use of various methods for charting, calculating & interpreting graph & chart to assess the performances & status of the price. It is the tool of financial analysis, which not only studies but also reflecting the numerical & graphical relationship between the important financial factors. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to the late 19th century. It uses charts and computer programs to study the stock‟s trading volume and price movements in the hope of identifying a trend . In fact the decision made on the basis of technical analysis is done only after inferring a trend and judging the future movement of the stock on the basis of the trend. Technical Analysis assumes that the market is efficient and the price has already taken into consideration the other factors related to the company and the industry. It is because of this assumption that many think technical analysis is a tool, which is effective for short-term investing. History of Technical Analysis:
Technical Analysis as a tool of investment for the average investor thrived in the late nineteenth century when Charles Dow, then editor of the Wall Street Journal, proposed the Dow theory. He recognized that the movement is caused by the action/reaction of the people dealing in stocks rather than the news in itself. Technical analysis is a method of evaluating securities by analyzing the Statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Just as there are many investment styles on the fundamental side, 11
there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued the only thing that matters is a security's past trading data and what information this data can provide about where the Security might move in the future.
Basic premises of technical analysis: 1. Market prices are determined by the interaction of suppl y & demand forces. 2. Supply & demand are influenced b y variety of supply & demand affiliated
factors both rational & irrational. 3. These include fundamental factors as well as psychological factors. 4. Barring minor deviations stock prices tend to move in fairly persistent trends. 5. Shifts in demand & supply bring about change in trends. 6. The persistence of trends & patterns analysis of past market data can be used to predict future prices behavior.
Drawbacks / limitations of technical analysis:
1. Technical analysis does not able to explain the rezones behind the employment or selection of specific tool of Technical analysis. 2. The technical analysis failed to signal an uptrend or downtrend in time. 3. The technical analysis must be a self defeating proposition. As more & more people use, employ it the value of such analysis trends to reduce.
Why we use TECHNICAL ANALYSIS?
1) Technical analysis provides information on the best entry an d exit points for a trade. 2) On a chart, the trader can see where momentum is rising, a trend is forming, a price is dipping or other events are developing that show the best entry point and time for the most profitable trade. With the constant movement of various currencies against each other in the Forex market, most traders will focus on using technical indicators to find and place their trades.
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IS TECHNICAL ANALYSIS DIFFICULT?
1)
Technical analysis is not difficult, but it requires studying different types of charts such as the hourly or daily charts, knowing which technical indicators to use and how to use them. 2) Computers and the Internet have made this process much easier. Most brokers provide basic charts and technical indicators for free or at a very low cost. 3) One way to avoid getting frustrated by all the lines, colors, and graphics is to focus on using only a few indicators that will provide you with the information needed. Try not to clutter your chart with too much information.
Fundamental vs. Technical Analysis
Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on the other hand, looks at economic factors, known as fundamentals. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years.
The future can be found in the past
If prices are based on investor expectations, then knowing what a security should sell for (i.e., fundamental analysis) becomes less important than knowing what other investors expect it to sell for. That's not to say that knowing what a security should sell for isn't important--it is. But there is usually a fairly strong consensus of a stock's future earnings that the average investor cannot disprove. Technical analysis is the process of analyzing a security's historical prices in an effort to determine probable future prices. This is done by comparing current price action (i.e., current expectations) with comparable historical price action to predict a reasonable outcome. The devout technician might define this process as the fact that history repeats itself while others would suffice to say that we should learn from the past.
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Usually the following tools & instruments are used to do the technical analysis: Price Fields
Technical analysis is based almost entirely on the analysis of price and volume. The fields which define a security's price and volume are explained below. Open - This is the price of the first trade for the period (e.g., the first trade of the day). When
analyzing daily data, the Open is especially important as it is the consensus price after all interested parties were able to "sleep on it." High - This is the highest price that the security traded during the period. It is the point at which
there were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices, but the High represents the highest price buyers were willing to pay). Low - This is the lowest price that the security traded during the period. It is the point at which
there were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices, but the Low represents the lowest price sellers were willing to accept). Close - This is the last price that the security traded during the period. Due to its availability, the
Close is the most often used price for analysis. The relationship between the Open (the first price) and the Close (the last price) are considered significant by most technicians. This relationship is emphasized in candlestick charts. Volume - This is the number of shares (or contracts) that were traded during the period. The
relationship between prices and volume (e.g., increasing prices accompanied with increasing volume) is important. Open Interest - This is the total number of outstanding contracts (i.e., those that have not been exercised, closed, or expired) of a future or option. Open interest is often used as an indicator. Bid - This is the price a market maker is willing to pay for a security (i.e., the price you will
receive if you sell). Ask - This is the price a market maker is willing to accept (i.e., the price you will pay to buy the
security).
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Price Styles
Price in a chart can be displayed in four styles: 1. Bar Chart. 2.
Line Chart.
3.
Candlestick Chart.
4. Point and Figure Charts
1) Bar Charts :
The highs and lows of a foreign currency are plotted in a diagram and the points are joined with vertical lines (bars). A small horizontal tick to the left denotes the opening level while a small horizontal tick to the right represents the closing price of each interval.
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2) Line Chart.
It gives the detailed information about every aspect. The exchange rates for each time period are plotted in a diagram and the points are joined. Prices on the y-axis, time on the x-axis. The line chart chooses for example the closing price of consecutive time periods, but can also work with daily, official fixings.
The relatively easy handling of line charts is a great advantage. Line chart sdo not show price movements within a time period. This can be a problem because important information for exchange rate analysis can be lost. This problem was remedied with the development of bar charts that represent amore sophisticated form of line chart
3) Candlestick Chart.
A candlestick is black if the closing price is lower than the opening price. A candlestick is white if the closing price is higher than the opening price.
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In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation. Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar chart, but in a manner that extenuates the relationship between the opening and closing prices. Candle stick charts are simply a new way of looking at prices, they don't involve any calculations. Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices .
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Bullish Patterns 1) Long white (empty) line. This is a bullish line. It occurs when prices open near the low
and close significantly higher near the period's high.
2) Hammer. This is a bullish line. It occurs after a significant downtrend. If the line occurs
after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low is significantly lower than the open, high, and lose).
3) Piercing line. This is a bullish pattern and the opposite of a dark cloud cover. The first
line is a long black line and the second line is a long white line. The second line opens lower than the first line's low, but it closes more than halfway above the first line's real body.
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4) Bullish engulfing lines. This pattern is strongly bullish if it occurs after a significant
downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.
5) Morning star. This is a bullish pattern signifying a potential bottom. The "star" indicates
a possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in.
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Bearish Patterns 1) Long black (filled-in) line. This is a bearish line. It occurs when prices open near the
high and close significantly lower near the period's low.
2) Hanging Man. These lines are bearish if they occur after a significant uptrend. If this
pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low was significantly lower than the open, high, and close). The bodies can be empty or filled-in.
3) Dark cloud cover. This is a bearish pattern. The pattern is more significant if the second
line's body is below the center of the previous line's body (as illustrated).
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4) Bearish engulfing lines. This pattern is strongly bearish if it occurs after a significant
uptrend (i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) line is engulfed by a large bearish (filled-in) line.
5) Evening star. This is a bearish pattern signifying a potential top. The "star" indicates a
possible reversal and the bearish (filled-in) line confirms this. The star can be empty or filled in.
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6) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern
usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a d oji star.
Reversal Patterns 1)
Long-legged doji. This line often signifies a turning point. It occurs when the open and
close are the same, and the range between the high and low is relatively large.
2)
Dragon-fly doji. This line also signifies a turning point. It occurs when the open and close
are the same, and the low is significantly lower than the open, high, and closing prices.
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3)
Gravestone doji. This line also signifies a turning point. It occurs when the open, close, and
low are the same, and the high is significantly higher than the open, low, and closing prices.
4)
Star. Stars indicate reversals. A star is a line with a small real body that occurs after a line
with a much larger real body, where the real bodies do not overlap. The shadows may overlap.
5)
Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern
usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.
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Neutral Patterns 1) Spinning tops. These are neutral lines. They occur when the distance between the
high and low, and the distance between the open and close, are relatively small.
2) Doji. This line implies indecision. The security opened and closed at the same price.
These lines can appear in several different patterns. Double doji lines (two adjacent doji lines) imply that a forceful move will follow a breakout from the current indecision.
3) Harami ("pregnant" in English). This pattern indicates a decrease in momentum. It
occurs when a line with a small body falls within the area of a larger body. In this example, a bullish (empty) line with a long body is followed by a weak bearish (filled in) line. This implies a decrease in the bullish momentum.
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4) Harami cross. This pattern also indicates a decrease in momentum. The pattern is
similar to a harami, except the second line is a doji (signifying indecision).
Example
Point And Figure Charts
The point and figure chart is not well known or used by the average investor but it has had a long history of use dating back to the first technical traders. This type of chart reflects price movements and is not as concerned about time and volume in the formulation of the points. The point and figure chart removes the noise, or insignificant price movements, in the stock, which can distort traders' views of the price trends. These types of charts also try to neutralize the skewing effect that time has on chart analysis.
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When first looking at a point and figure chart, you will notice a series of Xs and Os. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signaling a trend change.
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TRENDS IN TECHNICAL ANALYSIS The Use of Trends
One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed. Take a look at the chart below:
Isn‟t it hard to see that the trend is up. However, it's not always this easy to see a
trend:
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There are lots of ups and downs in this chart, but there isn't a clear indication of which direction this security is headed.
A More Formal Definition
Unfortunately, trends are not always easy to see. In other words, defining a trend goes well beyond the obvious. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a series of highs and lows. In technical analysis, it is the movement of the highs and lows that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.
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It is an example of an uptrend. Point 2 in the chart is the first high, which is determined after the price falls from this point. Point 3 is the low that is established as the price falls from the high. For this to remain an uptrend each successive low must not fall below the previous lowest point or the trend is deemed a reversal.
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Types of Trend
There are three types of trend: 1.Uptrend 2.Downtrend 3.Sideways/Horizontal Trends As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. If the peaks and troughs are getting lower, it's a downtrend. When there is little movement up or down in the peaks and troughs, it's a sideways or horizontal trend. If you want to get really technical, you might even say that a sideways trend is actually not a trend on its own, but a lack of a well-defined trend in either direction. Trend Lengths
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short-term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a near-term trend is anything less than a month. A long-term trend is composed of several intermediate trends, which often move against the direction of the major trend. If the major trend is upward and there is a downward correction in price movement followed by a continuation of the uptrend, the correction is considered to be an intermediate trend. The short-term trends are components of both major and intermediate trends. Take a look a Figure 4 to get a sense of how these three trend lengths might look.
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When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend.
Trend Lines
A trend line is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trend line is as simple as drawing a straight line that follows a general trend. These lines are used to clearly show the trend and are also
used
in
the
identification
of
trend
reversals.
An upward trend line is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trend line helps traders to 31
anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trend line is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.
Channels
A channel, or channel lines, is the addition of two parallel trend lines that act as strong areas of support and resistance. The upper trend line connects a series of highs, while the lower trend line connects a series of lows. A channel can slope upward, downward or sideways but, regardless of the direction, the interpretation remains the same. Traders will expect a given security to trade between the two levels of support and resistance until it breaks beyond one of the levels, in which case traders can expect a sharp move in the direction of the break. Along with clearly displaying the trend, channels are mainly used to illustrate important areas of support and resistance.
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A descending channel on a stock chart; the upper trend line has been placed on the highs and the lower trend line is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue.
The Importance Of Trend
It is important to be able to understand and identify trends so that you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders.
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IMPORTANCE OF VOLUME :What Is Volume?
Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume, the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.
Why Volume Is Important?
Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is 34
this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal. Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end. When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume. Volume And Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume, a process which we'll describe in more detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened. CHART PATTERNS:-
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. Chartists use these patterns to identify current trends and trend reversals and to trigger buy & sell signals.
In the first section of this tutorial, we talked about the three assumptions of technical analysis, the third of which was that in technical analysis, history repeats itself. The theory behind chart patterns is based on this assumption. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, chartists look for these Patterns to identify trading oppo rtunities. While there are general ideas and components to every chart pattern, there is no chart pattern that will tell you with 100% certainty where a security is headed. This creates some leeway and debate as to what a good pattern looks like, and is a major reason why charting is often seen as 35
more of an art than a science. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete. These patterns can be found over charts of any timeframe. In this section, we will review some of the more Popular chart patterns.
1.Head And Shoulders
This is one of the most popular and reliable chart patterns in technical analysis. Head and shoulders is a reversal chart pattern that when formed, signals that the security is likely to move against the previous trend. As you can see, there are two versions of the head and shoulders chart pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed at the high of an upward movement and signals that the upward trend is about to end. Head and shoulders bottom, also known as inverse head and shoulders (shown on the right) is the lesser known of the two, but is used to signal a reversal in a downtrend.
Head and shoulders top is shown on the left. Head and shoulders bottom or inverse head & shoulder is on the right. Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. Also, each individual head and shoulder is comprised of a high and a low. For example, in the head and shoulders top image shown on the left side, the left shoulder is made up of a high followed by a low. In this pattern, the neckline is a level of support or resistance. Remember that an upward trend is a period of successive rising
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highs and rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in a trend by showing the deterioration in the successive movements of the highs and lows. 2.Cup And Handle
A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.
The price pattern forms what looks like a cup, which is preceded by an upward trend. The handle follows the cup formation and is formed by a generally downward/sideways movement in the security's price. Once the price movement pushes above the resistance lines formed in the handle, the upward trend can continue.
3.Double Tops And Bottoms
This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained 37
trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often
used
to
signal
intermediate
and
long-term
trend
reversals.
A double top pattern is shown on the left, while a double bottom pattern is shown on the right.In the case of the double top pattern, the price movement has twice tried to move above a certain price level. After two unsuccessful attempts at pushing the price higher, the trend reverses and the price heads lower. In the case of a double bottom (shown on the right), the price movement has tried to go lower twice, but has found support each time. After the second bounce off of the support, the security enters a new trend and heads upward.
4.Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three types of triangles, which vary in construct and implication, are the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.
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The symmetrical is a pattern in which two trend lines converge toward each other. This pattern is neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction. In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward sloping. This is generally thought of as a bullish pattern in which chartists look for an upside breakout. In a descending triangle, the lower trend line is flat and the upper trend line is descending. This is generally seen as a bearish pattern where chartists look for a downside breakout.
5. Flag And Pennants
These two short-term chart patterns are continuation patterns that are formed when there is a sharp price movement followed by a generally sideways price movement. This pattern is then completed upon another sharp price movement in the same direction as the move that started the trend. The patterns are generally thought to last from one to three weeks.
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There is little difference between a pennant and a flag. The main difference between these price movements can be seen in the middle section of the chart pattern. In a pennant, the middle section is characterized by converging trend lines, much like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with no convergence between the trend lines. In both cases, the trend is expected to continue when the price moves above the upper trend line
6.Wedge
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a symmetrical triangle except that the wedge pattern slants in an upward or downward direction, while the symmetrical triangle generally shows a sideways movement. The other difference is that wedges tend to form over longer periods, usually between three and six months.
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The fact that wedges are classified as both continuation and reversal patterns can make reading signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge is bearish. We have a falling wedge in which two trend lines are converging in a downward direction. If the price was to rise above the upper trend line, it would form a continuation pattern, while a move below the lower trend line would signal a reversal pattern
SUPPORT AND RESISTANCE :
Once you understand the concept of a trend, the next major concept is that of support and resistance. You'll often hear technical analysts talk about the ongoing battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by the prices a security seldom moves above (resistance) or below (support).
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Support is the price level through which a stock or market seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level that a stock or market seldom surpasses (illustrated by the Red Arrows).These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trend lines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance likely be established. Round Numbers and Support and Resistance:-
One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning
points
at
which
many
traders
will
make
buy
or
sell
decisions.
Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as $50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major
psychological
points
as
well.
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Role Reversal
Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance.
For example, as you can see, the dotted line is shown as a level of resistance that has
prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance is broken, it becomes a level of support (shown by Points 3 and 4) by propping up the price and preventing it from heading lower again. Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most well-known companies. For example, this phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003 and 2006. Notice how the role of the $51 level changes from a strong level of support to a level of resistance.
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In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels.
The Importance of Support and Resistance
Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing.
Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance levels of an upward trending channel, the trend have accelerated, not reversed. This means that the price appreciation is expected to be faster
than
it
was
in
the
channel.
Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at
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the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support
Summary of charts
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TECHNICAL ANALYSIS OF A STOCK:-
Power Grid Corporation of India Limited (POWERGRID), (NSE: POWERGRID, BSE: 532898) is an Indian state-owned electric utilities company headquartered in Gurgaon, India. Power Grid wheels about 51% of the total power generated in India on its transmission network. Power Grid has a pan India presence with around 94,185 Circuit-km of Transmission network and 135 nos. of EHVAC & HVDC sub-stations with a total transformation capacity of 91,945 MVA. The Inter-regional capacity is enhanced to 22400 MW. Power Grid has also diversified into Telecom business and established a telecom network of more than 21,000 km across the country. Power Grid has consistently maintained the transmission system availability over 99.00% which is at par with the International Utilities. POWERGRID is committed to: a) Establish and maintain an efficient and effective "national grid " with due regard to time, cost, technology, and value additions. b) Sustainable development through conservation of natural resources and adopting environment friendly technology on principle of avoidance, minimization and mitigation c) Ensure safe, occupational hazard free and healthy work environment, to the satisfaction of stake holders in all areas of its activities and shall endeavor to continually improve its management systems and practices in conformity to legal and regulatory provisions.
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Share Holding Patterns
Promoter (India)
69.43%
Institution
20.93%
Non-Institution
9.64%
Custodians
0.00%
Promoter (For)
0.00%
Price’s of Power Grid
Month Aug‟2011 Sep‟2011 Oct‟2011 Nov‟2011 Dec‟2011 Jan‟2012 Feb‟2012 March‟2012 April‟2012 May‟2012 June‟2012 July‟2012
Open 105.70 101.00 97.30 103.60 100.95 99.40 103.20 111.65 108.65 112.00 105.50 113.80
Close 107.50 105.70 101.00 97.30 103.60 100.95 99.40 103.20 111.65 108.65 112.00 105.50
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Technical Analysis of Power Grid: Accumulation/Distribution:
This chart is showing the pattern of accumulation/distribution with the price pattern of Power Grid and we can easily see that the indicator is following the same pattern as the price of power grid.
But for now looking at this indicator is showing downward trend in the prices. Because as an when price move to 10m in indicator the price tend to fall and there is one another reason that is prices are going down and indicator is going up that also shows the negative trend in the prices.
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Bollinger Bands
The chart shows that prices are moving within Bollinger band and trading days where this script is very volatile and at some point of time its less volatile. During the Oct – Nov 2011 and May – June 2012 the Script seems to be more trading months. But looking at the current situation the script shows a selling signal but as the prices reaches below the Bollinger band the prices would again tend to move upside but it all depends on the sentiments and situation which would be prevailing in the market at that point of time. But for now one should sell the particular script to gain a profit of about 5 – 10% in near future.
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Commodity Channel Index:
The chart shows that the CCI is moving in line with the prices and the as prices goes up the CCI also goes up and vice versa. By the chart, if we are looking for the current trend its moving downward for short run but it still bullish for medium term.
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Envelope:
Currently stock is showing that prices will go down but as it will touch its lower envelope band its will move upward
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MACD:-
Currently looking at the chart the MACD has crossed the EMA 9 from the upside and this is a kind of negative sign and this negativity is going to be there until the MACD move above the EMA cutting it from below
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Momentum:-
Earlier chart has shown some indication about sell and buy and they come true as it can be seen from the chart itself. Now the chart is showing selling indication for intraday basis and for short term its good when indicator goes to the lower level as it has made earlier
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Moving Average:-
Looking at the chart one can easily interpret that moving average is roaming around the price but still giving some indication about price movement for near future. Sometime it shows indication of sale and buy at given point of time.
Looking for future price we cannot easily interpret the movement at this point of time but still some indication of sale is shown in the graph as the price of share take support at the 15 days moving average and further going down. It shows a downturn for short term period and if price cross moving from below and goes above the moving average that would be the best time to buy the stock.
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On Balance Volume:-
Currently the indicator is making low high than the previous high and its indicates the downturn in intraday basis. But as it breaks the current trend prices tend to move upside with a bang.
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Price Oscillator:-
Currently the share prices according to the indicator is trading high and it gave a signal of selling share prices for short term and for long term
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Volume:-
Current trend of volume shows that price tend to move upward but the rally will not exceed 2-3 days. After that we need to see the chart again because the indicator is not so trustworthy as others
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Volume Oscillator:-
The chart shows that price will tend to move downside in short term but on intraday basis it will move upside.
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CONCLUSION
Technicians, those who practice technical analysis, try and predict the actions of security costs by charting and studying the different variables at work within the market. They believe performance is largely cyclical and reliant on outside forces that can be determined.
Technical analysis is a particular approach for investing which appeal to investors.
Technical analysis is concerned with the share price.
Technical analysis is useful for short term trading.
Technical analysis helps to check the fundamentals of companies.
It helps to study d emotions in the market by studying market itself
Provides information on the best entry and exit points for a trade.
Is based almost entirely on the analysis of price and volume
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