1.Introduction: The re-emergence of technical analysis as a viable and efficient approach to individual stock selection and market analysis has drawn a great deal of interest among practitioners and academicians.
Technical analysis, or the use of past prices to predict future prices, has been popular among investors and financial analysts despite its criticisms levelled at it. All stock broking firms and major daily newspaper analyze and publish tech techni nica call comme comment ntar ary y on the the perfo perform rman ance ce of the the mark market et as whol wholee and and selected stocks on a daily basis. Public seminar and consulting firms that solely based on technical analysis are even formed. for med.
In today’s world companies become known or considered big when they are listed on reputed Stock Exchanges namely NSE (NIFTY) & BSE (SENSEX) for India, Dowjones for USA, HANGSENG for Hong Kong, NIKKEI for Japan, RTS for Russia etc.
Once the company is listed everything a company does / doesn’t is reacted upon by the public and the prices of the share of the respective company fluct fluctua uate te.. Now Now the the comp compan any y woul would d alwa always ys want want a true true pict pictur uree of the the company to be represented by share price, they wouldn’t mind if its over valued but it hurts when the stocks get under valued.
But this uncertainty of the price gives people a chance to make money both in long term & short term. Long term investment is mainly based upon
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studying fundamentals of the company and its growth potential. A general investor can apply the principles by using the simplest of tools: pocket calc calcul ulat ator or,, penc pencil il,, ruler, ruler, char chartt pape paperr & your your caut cautio ious us mind mind,, watc watchf hful ul attention. It should be pointed out that, this analysis does not discuss how to buy & sell shares, but does discuss a method which enables the investor to arrive arrive at buying buying & sellin selling g decisi decision. on. The financ financial ial analys analysts ts always always need need yardsticks to evaluate the efficiency & performances of any business unit at the the time time of inve invest stme ment nt.. Fund Fundam amen enta tall anal analys ysis is is usef useful ul in long long term term invest investmen mentt decisi decision. on. In Fundam Fundament ental al analys analysis is compan company y s goodwi goodwill, ll, 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. The real piece of magic lies in making money by trading shares either Intraday or holding for a short term It appeals mainly to short term traders. If one wants to make money in this way he / she needs to know the technical side of the stock i.e. charts, trends etc. This analysis uses varied technical patterns and indicators for predicting future prices and trends in the stock.
The main objective is to know the answers of following questions:
1. Where will stocks go from here? 2. Which stock will rise today and which ones will fall? 3. Should I hold it or square off my positions? 2
4. Why is hedging required / how is it done?
The emergence of equity markets in Asia provides great opportunities for loca locall and and glob global al inve invest stor ors. s. This This pape paperr exam examin ines es some some popu popula larl rly y used used techni technical cal indica indicator torss and patter patterns, ns, namely namely the moving moving averag average, e, Moving Moving Averag Averagee Conver Convergen gence ce and Diverg Divergenc encee (MACD (MACD), ), relati relative ve streng strength th index index (RSI), Stochastic Oscillator, Bollinger bands, Commodity Channel Index (CCI) etc. and the patterns like Double Top, Double Bottom, Head and Shoul Shoulde derr Bott Bottom om Reve Reversa rsall / Top Top Reve Revers rsal al,, Roun Roundi ding ng Top, Top, Roun Roundi ding ng Bottom, Flag and Pennant continuation, Triangles ( ascending, descending and symmetrical), Wedges, Wedges, Megaphone Patterns etc. and breakout by using different levels of length which are considered to be appropriate in the local trading environment. The blue chip stocks of the National Stock Exchange (NSE) are used in this study. The index is influenced more by local factors and forces rather than global information variables.
This This pape paperr cont contrib ribut utes es to a more more comp compre rehe hens nsiv ivee unde unders rsta tand ndin ing g of the the predictive ability and technical analysis of stocks listed in NSE.
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2.Literature Review: Technical analysis is explained by “The technical approach to investigate is essentially a reflection of the ides prices moves in trends which determined by the changing attitudes of the investors toward a variety of economic, monito monitory, ry, politi political cal and psycho psycholog logica icall forces. forces. Techni Technical cal analys analystt do not attempts to measure a security’s intrinsic value, but instead use charts to identify the patterns that can suggest future activity. Testing of technical analysis is important to enjoy the benefits. William sharpe said “if you torture the data long enough, it will confess to any crime” so the important is the rule must work on data other than that used to discover it.
There are many evidence to support technical analysis, in July 1990 journal of finance article, Jaegadeesh found predictable patterns in monthly returns for the period 1934 to 1987. his study reveals that stocks with large losses in one month tend to show a significant reversal in the following month and vice versa. In December 2002 journal of finance article Lo, Mamaysky, and Wang found that several technical indicators have some practical value as they provide incremental information.
Brown and Jennings (1989) showed that technical analysis has value in a model in which prices are not fully revealing and traders have rational conjectures about the relation between prices and signals. Frankel and Froot (1990) showed evidence for the rising importance of chartists. Neftci (1991) showed that a few of the rules used in technical analysis generate well-defined techniques of forecasting, but even well-defined rules
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were were show shown n to be usel useles esss in pred predic icti tion on if the the econ econom omic ic time time seri series es is Gaussian. However, if the processes under consideration are non-linear, then the rules might capture some information. Tests showed that this may indeed be the case for the moving average rule.
Taylor and Allen (1992) report the results of a survey among chief foreign exchange dealers based in London in November 1988 and found that at least 90 per cent of respondents placed some weight on technical analysis, and that there was a skew towards using technical, rather than fundamental, analysis at shorter time horizons.
In a comprehensive and influential study Brock, Lakonishok and LeBaron (1992) analyzed 26 technical trading rules using 90 years of daily stock prices from the Dow Jones Industrial Average up to 1987 and found that they all outperformed the market.
Blume, Easley and O’Hara (1994) show that volume provides information on information quality that cannot be deduced from the price. They also show that traders who use information contained in market statistics do better than traders who do not.
CheolCheol-Ho Ho Park and Scott Scott H. Irwin Irwin wrote wrote ‘the ‘the profit profitabi abilit lity y of techni technical cal analysis: A review’ Park and Irwin (2004), an excellent review paper on technical analysis.
Kavajecz and Odders-White (2004) show that support and resistance levels coincide coincide with peaks in depth depth on the limit order book 1 and moving average average 5
forecasts reveal information about the relative position of depth on the book. They also show that these relationships stem from technical rules locating depth already in place on the limit order or der book.
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3.Objective of Study: The professional objectives which are being covered by me in this project are as following-
To understand the Technical Analysis which is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data
To understand the use of charts and other tools to identify patterns that can suggest future activity .
To understand the use of of various technical technical indicators and patterns for evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume.
To test whether the investment yields any extra returns in stocks with the help of technical indicators and patterns or not.
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4.Methodology: a) The study:
Technical analysis is a security analysis technique that claims the ability to
forecast the future direction of prices through the study of past market data, primarily primarily price and volume. In its purest form, technical technical analysis considers only the actual price and volume behavior of the market or instrument. Technical analysts may employ models and trading rules based on price and volu volume me tran transf sfor orma mati tion ons, s, such such as the the rela relati tive ve stren strengt gth h inde index, x, movi moving ng averag averages, es, regres regressio sions, ns, interinter-mark market et and intra-m intra-mark arket et price price correl correlati ations ons,, cycles or, classically, through recognition of chart patterns. Technical analysis stands in distinction to fundamental analysis. Technical analysis "ignores" the actual nature of the company, market, currency or commodity and is based solely on "the charts," that is to say price and volume information, whereas fundamental analysis does look at the actual facts of the company, market, currency or commodity.
For example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team. Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; othe others rs use use tech techni nica call indi indica cato tors rs and and osci oscill llat ator ors, s, and and most most use use some some combination of the two. In any case, technical analysts' exclusive use of hist histor oric ical al pric pricee and and volu volume me data data is what what sepa separa rate tess them them from from thei their r fundamental counterparts. Unlike fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing that matters is a
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security's past trading data and what information this data can provide about where the security might move in the future.
The major technical indicators will be uses for the study are: A simple moving average (SMA) is the un weighted mean of the previous n
data points. [ For example, a 10-day simple moving average of closing price
is the mean of the previous 10 days' closing prices. If those prices are then the formula is
When calculating successive values, a new value comes into the sum and an old value drops out, meaning a full summation each time is unnecessary,
In technical analysis there are various popular values for n, like 10 days, 40 days, or 200 days. The period selected depends on the kind of movement one is concentrating on, such as short, intermediate, or long term. In any case moving average levels are interpreted as resistance in a rising market, or support in a falling market. An exponential moving average (EMA), also known as an exponentially weig weight hted ed movi moving ng avera average ge (EWMA (EWMA), ), is a type type of infin infinit itee impu impuls lsee resp respon onse se filt filter er that that appl applie iess weig weight htin ing g fact factor orss
whic which h decr decrea ease se
expone exponenti ntiall ally. y. The weight weighting ing for each each older older data data point point decrea decreases ses
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expone exponenti ntiall ally, y, never never reachi reaching ng zero. zero. The formul formulaa for calcul calculati ating ng the EMA at time periods t > 2 is
Where: •
The coefficien coefficientt
α
repres represent entss the degree degree of weight weighting ing decrea decrease, se, a
constant smoothing factor between 0 and 1. A higher older observations faster. Alternatively, of
N
time time period periods, s, where where
equivalent to
α
α
α
α
discounts
may be expressed in terms
= 2/( N +1). + 1). For For exam exampl ple, e,
N =
19 is
= 0.1. The half-life of the weights (the interval over
which which the weights weights decrea decrease se by a factor factor of two) two) is approx approxima imatel tely y /2.8854 N /2.8854
(within 1% if N > 5).
•
Y t t is
the observation at a time period t .
•
S t t is
the value of the EMA at any time period t .
Bollinger Bands is a technical analysis tool invented by John Bollinger in
the 1980s. Having evolved from the concept of trading bands, Bollinger Bands can be used to measure the highness or lowness of the price relative to previous trades. Bollinger Bands consist of: •
a middle band being an N -period -period simple moving average (MA)
•
an upper band at
K
times an
-period N -period
standard deviation above the
-period N -period
standard deviation below the
middle band (MA + Kσ ) •
a lower band at
K
times an
middle band (MA − Kσ )
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Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice. choice. Usually Usually the same period period is used for both both the middle middle band and the calculation of standard deviation. techni nica call indi indica cato torr used used in the the tech techni nica call Relative Relative Stre Strength ngth Index Index: is a tech analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.
And many other indicators and Patterns will be used for the purpose. b) The Sample:
For the purpose of this study a sample size of 3 real estate companies (UN (UNITEC ITECH H
Limi Limite ted, d, DLF Limi Limitted and Housin using g
Devel evelo opmen pmentt
&
Infrastructure Limited (HDIL)) listed in the NSE and they were the most active securities during the year 2009-2010. The data of the companies are then constructed with help of information available on their websites and on the other other financi financial al servic servicee provid providers ers’’ websit website. e. The techni technical cal parame parameters ters being used in the study are the different patterns and indicators like moving average, Moving Average Convergence and Divergence (MACD), relative strength strength index index (RSI), Stochastic Stochastic Oscillator, Oscillator, Bollinger Bollinger bands, Commodity Commodity Channel Index (CCI) etc. and the patterns like Double Top, Double Bottom, Head Head and and Shou Should lder er Bott Bottom om Reve Revers rsal al / Top Top Reve Reversa rsal, l, Roun Roundi ding ng Top, Top, Rounding Bottom, Flag and Pennant continuation, Triangles ( ascending, descending and symmetrical), Wedges, Megaphone Patterns etc.
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C) The Tools Tools for Data Collection:
This step helps in deciding and selecting the techniques that shall be used to coll collec ectt rele releva vant nt info inform rmat atio ion n whic which h can can be used used to solv solvee the the rese resear arch ch problem. The techniques used by me for f or data collection are: •
Secondary data
•
Tertiary data
SECONDARY DATA
Secondary data means data are already available i.e., they refer to the data, which have already been collected and analyzed by someone else. Secondary data are:
Internet
Books
Newspapers
Publication of various associations
Research reports
My research will be based on the information available on the different secondary data sources and guidance provided by my research guide who helped in interpreting the intricate data. Tools for Data Analysis: •
Moving Average 12
•
Accumulation/Distribution
•
Bollinger Bands
•
Commodity Channel Index:
•
MACD
•
Momentum
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5.References: BIBLIOGRAPHY
Book Book-- Rese Resear arch ch Meth Method odol olog ogy y Meth Method odss and and Tech Techni niqu ques es by C.R. C.R. Koth Kothar ari, i, All All Abou Aboutt Stoc Stock k [Aut [Autho horr - Mr. Mr. Esme Esmehe he Faerb Faerber er], ], V. K. Bhalla- working capital management, security ananlysis and portfolio management by Punithavathy Pandian.
Newspapers ( Economic Times, Business Standard S tandard etc) Other Research Papers: Technical Analysis in the Malaysian Stock Market: Market: An Empirical Empirical Evidence, Evidence, Understand Understanding ing and Implementin Implementing g Technical Analysis on Capital Markets, Technical Analysis and the Stochastic Properties of the Jordanian Stock Market Index Return, The Evaluation of the Lithuanian Stock Market with the Weak-form Market Efficiency Hypothesis etc.
WEBLIOGRAPHY
Moneycontrol.com
www.nseindia.com
www. Chittorgarh.com
Profit.ndtv.com
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www.investopedia.com
Websites of each Company.
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