Txhmical

Anabsts

TECHNICAL ANALYSIS

8/ Introduction
8.2 The Basic
Assumption under Technical Analysis
8.3 Charting Techniques
84 ChartAnalysis
85 TechnicalIndicators
86 DOWTheory
R7 Technical Vs.
Fundamental Analysis
Analysis
&8 Critical of Technical Technical
89 Can Fundamen
tal & Analysis be used
Simultaneously
8.10Exercise

8.1.........INTRODUCTION
discussed in the chapter on Fundamental Analysis', there
As company's stock viz.
approaches to analyse Fundamental
are two analysis and Technical analysis.
Eundamental
analysing various factors such which affect
analvsis involves income in order to estimate its
company's cash tlows and its
value.
takes a completely different approach; it
Technical analysis "Intrinsic value" of a company.
the
doesn't care one bit about interested in the price movementsin
Technical analysts are only
the market.
jargons and techniques it employs,
Despite all the fancy studies supply and demand in a
just
technical analysis really determine what direction, or trend,other
will
to
market in an attempt gauge investor sentiments. In
and to in
continue in the future attempts to understand the emotions
words, technical
analysis
market itself, as opposed to its
studying the
the market by 90%
components. believes that market movement is
FundamentalAnalusis economic situation and company's
due to logical
factors such as
emotions prevailingin stock market,
10% due to
performance and technical believes reverse ie. market
analysis due to investor
against this and 90%
aS to logical factors limitations of
mOvement is 10% duederstand the benefits
and
 TYBMS Investment Analysis and Portolio
technical analysis, it can give you a new set of tools or
wrllenable you to be abetter trader or investor,
Managema,
skills
8.2. .THE BASIC A8sUMPTIONS UNDER thrn
ANALYSIS
Technical analysis is a method of TECHNICAL
evaluating securitie,
analysing the statistical data generated by market
as past prices and volume of trading of a
Technical analysts do not attempt to measure a particular activity, Such
value, but instead use charts and other tools security's
to
sintrhinharsie
thatcan suggest future activity. identify pattern:
Just as there are various tools available for
analysis (for e.g. Ratio analysis, studying internal
pattern of the company, etc.), there are also
many
fumanagemen:
ndamenta
of technical traders. Some
different
rely on chart patterns; otherstype,
technical indicators, and soma may also use some i.
the two. But the fact that, technical combination t
analysts only
price and volume data separates them from their use historiot
counterparts. In other words, technical analystsfundamentedon't ca
whether a stock is undervalued - the only thing that matters th
them is a security's past trading data in terms of prices &
and what information this data can provide volume
about futurs
movement of the share price.
The field of technical analysis is based on thre:
assumptions : (1) The market discounts everything, (2) Price
noves in trends, (3) History tends to repeat itself.
8.2.1..........he Market Discounts Everything
A major criticism of technical analysis is that it only
considers price movement, ignoring the fundamental factors o
the company. However, technical analysis assumes that, at any
given time, a stock's price reflects everything that has or could
affect the company - including fundamental factors and therefor:
is not required to be considered separately. This only leaves th
analysis of price movement, which any individual knows is a
product of the supply and demand for a particular stock in the
market.
8.2.2.......rice Moves in Trends
In technical analysis, price movements are
believed to follow
trends. This means that the future price movement is
to be in the same direction as the most like)
trend than to be against it aro
the same has been established. Most
analysis are based on this assumption. strategies of technica
 HlstoryTendstoRepeat Itseif
idegin
important technical analysis is
in terms of price that history
Another
itself, mainly movernent The
repeat
price movements is attributed to marva:
natureofwords, market participants tend to
to
ends
other provide a
similar market situation over time
rearctionto
onsistent
uses chart patterns to analyze market
analys1S
fahica/
and
understand trends. Although many of these
from centuries, they are still believed to be
moremeits used
been patterns of price movements that
they provide
haIe
because
charts
ere
often
repetitive,
elerant
..CHARTINGTECHNIQUES
of charts that are used by
four main types
are
There traders depending onthe information that they are
and
inTestors
individualskilllevels.
their
seeking
arnd Techniques are :
Charting
types/
chart chart,
line
al The chart,
bar
bl Thecandlestickchartand
The figurechart.
C
and detail, notice how
point discussed in
d The techniques are but the waythe
same,
A1 theabove create the chartsis thedifferent.
used to chartsis
thedata
and shown in the
represents only the closing
Gatais plotted Line charts therefore the most
Chart : are
al Line period oftime andcharts do not provide
set
prices over a four charts. Line for the individual
the trading range
simple of But, the
information ofthe and openingprices. price
visual high, low the most vital
as the be
pointssuch often considered to and low tor the day
Closingpriceiscomparedto the high in line charts.
data value used
In stock whyit is theonly
and this is
 4

TYBMS - Investment
Analysis and
Note: an up day is significd by a
Adown day is
represented
white (or
by a black or
Portf
empty) box.
ol o Man
The "box" shows the
open to close range.
The "wick" displays the full
shhaded box.
day's range.

12

126:
1260
1253
1250
Feb ruary arch 124$
Fig, 8.4 : Candle Stick Charts
d) The point and figure chart : The point and figure char
is not well known or used by the average investor but i
has had a long history of use dating back to the irst
technical traders. This type of chart reflects pricc
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 pric
movemnents, in the stock, which can distort traders' views
of the price trends. These types of charts also try to
neutralise the skewing effect that time has on char
analysis.
 1306

1240

1200

1150

1100

08 M05

Chart
Point & Figure
Fig.8.5

and figure chart, you will notice

point trends and
looking at a represent upward price numbers
Whenfirstand Os. The Xs trends. There are
also
series
ofXs
ddownward
price
represent months, and give
represent
A
the chart;
these
on the chart represents
theOs
lettersin the date. Each bOx
price of thestock:
end idea of dependingon the represents. On
inTestorsan adjusts each box
which more a box
spricescale, stock's price the between 20 and 100.
e higher the the price is other critical point ofa
where The
most charts point for the stock. criteria. This is usually set
1
roresents 1, or chart reversal chartist's
is the according to the
poÍnt and figure can also be set much theprice has
to
it how
et three but reversalcriteria set trend to create a
new
discretion. The the price order
from the high or low in price has to move in
mOVe away the When
other words,how much of Os, or vice versa. to
Tend or, in become a column another, it shifts
Xs to trend to
ua column of moved fromn one
the price trend has
the right, signalling a trend change.
8.4. ...CHART PATTERNS stock chartthat
formation on a movements.
Achart pattern is a distinct future price
sign of and trend
Cteates a trading signal, ortoa identify currenttrends
Chartsialstss and to trigger buy and sell
Tever
Use these patterns signals.
 TYBMS -Investment
Types of Trend
There are three tvpes of trend : Analysis and
i) Up trends
ii Downtrends
PortfalnM
iii) Sidewavs/Horizontal Trends
As the names imply,
is higher, it's referred to when each
as an
movement up or down in the peaks
success
downtrend.
ive
troughs are getting lower, it's a upward trend, Irpeak an
When he
and
troughs, herepeak
or
horizontal trend. If you want to get really
even say that a sideways is it
but a lack of a
the market can really
trend
well-defined
is
trend
actually not a
in
either
only trend in these
tdireectchniiocn.al.,
trend
nowhere. In
three ways: up,aniy at

Flg. 8.8: Up Trend

Trend Lengths
An up
trend,
long time period, down
short
trend or horizontal trend can
continue fo:
time
a trend of any period or intermediate timne period
accordingly
term trend, direction can be classified as a long
intermediate
the stock market, a trend or a
short-term trernd. In terms o!
lasting longer than 12 major trend is generally
months, An. categorized as ont
Considered last between one month to aintermediate trend 8
to
near-term trend is guarter of a year and a
is comnposed of anything less than a month. A long-term treu
several
against the direction of intermediate trends, which often mo
the major trend. If the major trend
upward and there is a downward
followed by a continuation of thecorrection in price moveme
considered to be an intermediate trend.uptrend,
The
the correction
Components
Fiøure 8
of both major and short-term trends
 Short-Term Trenda.
40

Medlum-TermTrend

30

26

20

Long-TermTrend 16
N02
AMJ AS 0
2005 M
TrendLength
Ng. 8.9: important that the chart is
it is analysed. To
analyzing trends, type of trend being
When t o best reflect
the or daily charts
trends. weekly charts
anstructed long-term used by chartiststo get a better
identify period are charts are best used when
five-year trend. Daily data
hejp
spanninga long-term short-term trends. It is also
ofthe
intermediate and the trend, the more
both the longer as
two-month trend is not
ea
analyzing remember that
importantto example, a
it is; for trend.
t
importan two-year
siznificantasa that adds a line to
technique a
Trendlines
simple charting
or a stock. Drawing
isa market follows a
Atrendline the trend in the straight line that
torepresent drawing a show the trend and
Achart simple as clearly can be
trendline is asThese lins are used to trend reversals. As
Reneral trend. the identification of drawn at the lows of
in trendline is has
are alsoused 8.10, an upward the support the stock is
sten in Figure This line
represents
Notice how the price
trend. a low. trendline helps traders
an upward moves from a high to
tvery time it support. This type ofprice willbegin moving
propped up by this which a stock's at the
point at trendline is drawn
resistance
the
Danticipate Similarly, a downward represents the
upwards again. lowv to a
downward trend. This lineprice moves from a
highs of the time the
level that a stock faces every
high.
Channele
Investment Anolysie and
Achannel, or channel lines, is the Pofar
trendlines that act as strong areas of
upper trendline connects a series of addi
support ti
and resion of
highs,
channel whiresleiat Tr
trendine connects a series of lows. A
downward or sideways but, regardless of can ha
interpretation remains the same. the
security to trade between the two levels of Traders wil directi
untal it breaks beyond one of the levels, in
expect a sharp move in the direction of
support
and
which
case
clearly displaying the trend, channels theare break. trader
illustrate important areas of support and resistance
Figure 8.11 shows a descending
channel on a
mainlyAlong
u3e
the upper trendline has been placed on
trendline is on the lows. The price has
the
highsoff andstockthe chaic
several times, and has remained range-bound bounced
of
As long as the price does not fall for severalthese
mor
bevond the upper resistance, the below the lower do. line or mg
range-bound
expected to continue.
downtrend
170
18.5
18.0
155
15.0
14.5
14.0
13.5
13.0
12.5
12.0
11.5
11.0
10.5
10.0
95
90
85

75
Jul Aug |Sep Oot Nov Dec 2006| Mar pr Nay
Fig. 8.10 : Trend Line
 1

43,
43
42
42 0
415
41 0
405

39.0
385
12 19 26
8 16 2? 29 September
18 26 |Agust
Fig.8.11 : Channel
able to understand andidentify trends
importantto be against them.
is trade with rather than
It can
64.2.......Support
yoU and Resistance
that
so
a trend is understood, the next major
concept of resistance. You must have often
Once the and
that of support bears and the battle that goes
around
conceptis bulls and the
between buyers (demand) and
the struggle bythe prices a security seldom
about
heard or
them, is revealed
between This: (support).
(supply). below
sellers (resistance) or
TOves above 320
Resistance
31.3

310

Support 290

286
280

s0000

February
2008 ortlevel
ember
 TYBMS - Investment Analysis and

As you can see in Figure 8.12, support is

through which a stock or market rarely falls he
priCe
upward arrows). Resistance, on the other hand, is
that a stock or market rarely exceeds (denoted
arrows).
(denoted
by the
a

Why does it happen?

These support and resistance levels are seen as

demand.inportant
terms of market sentiments and supply and
and resistance levels are the levels at which a lot
of S
willing to buy the stock (in the case of a
case of resistance). When these trendlinessupport) or sell
are broken,
and demand and the sentiments behind the
stock's the supg
thought to have shifted, in which case new levels
resistance will likely be established. This
the price levelof the security.
of
indicates moveme
Supp0rnt ts
i;
major Shii and
Role Reversal
Role reversal refers to a situation where the role
of
resistance level is reversed, this happens when a support
support level is broken. If the price falls below a resistance o
o
that level will become support level
resistarnce. the price rises ab0ve
If
resistance level, it will often become support. Supply and demani
is thought to have been shifted as the price moves past a
level o
support or resistance, causing the breached level to reverse its
role. But for a true reversal to occur, it is important that the price
make a strong move through either the support or resistance.
For example, as you can see in Figure 8.13, 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 pushing up the price and
preventing it from heading lower again.

Fig. 8.13 : Role Reversal

 8upport and Reslstance
of
Importance
analysis can be used to nake
andresistance
Support identify a trend reversal it becornes ar
rhe decisionand
trader may decide to buy
As trends. For example, a tested several times
rading partof support
level that has been because it is
breached or reversed
important
a been level,
seCurity at
has
never
will reduce from such support a
price security at or near
thatthe
but
aarlier
by selling a
unlikely be boooked
highly profitscan
level. trends
similarly resistance both test and confirm
tested resistance levels uses technical analysis.
ine and anyone who these levels of
Support monitoredby between
needto be the share remains to continue. It is
price of trend is likely support
a sthe beyond a level of
and
tance, the
long resis a break reversal. For example,
support and
As however,that
note, have to be a upward trending
important to always of an
resistance does
not resistance leevels reversed. This means
the in
or moved above accelerated, not faster than it was
if
prices
the trend have expected to be
channel, appreciation is resistance
price support and
that the
thechannel. important Traders should
traded. around
aware of these a stock is the area
Being
afect the way major points, as
pointsshouldorders at these instability.
placing lotof
avoid marked bya patternsin
usually Shoulders chart
them is reliable when
8.4.3..........Headand popularand patternthat the
one of the most reversalchart move against
This isanalysis. It is a likely to there are two
is
security Figure 8.14,
technical that the from pattern. Head and
signals
formed, As
seen
can be shoulders chart pattern that is formed
upward
previous trend. head and isa chart that the bottom
versions of the (shownon the
left)
movement and
signalsshoulders
shoulders top upward this Head and (shown on the
shoulders
the high ofan end as against head and
at about to asinverse downtrend.
trend is known reversalina similarin that
also signala patterns are neckline.
which is shoulders and a
usedto headand shoulders, a head shoulder is
right)is these and and
Both of mainparts: two individual head in the head left
four each example, 8.14, the
there are this, low., For Figure pattern,
addition to high and a left sidein this
In the In
comprised ofimage a shown on followed by a low. Remember that
an
shoulders top made
high
up ofasupportorresis
tance.
highs and rising
asslder is
a level of successive risingtherefore,
indicatesa
neckline is period of pattern,
*he trend is a shoulders chart
uard
head and
 TYBMS Investment
weakening in a frend by showing the Analysis and
0CeSRie Movement8 of the highs and
lows. I'ortlhey
Head

8houlder
Shoulse

Shoulder
Head
ig. S.14: Head and shoulders top is shown on the left.
bottom, or inverse head and
8.4.4. .Cup and Handle is onshoulders,
the Head rigahtnd sht
A cup and handle chart is a
continuation pattern in which the
but has only paused tor some time trend upwardbullish
upward direction once the pattern is and will
confirmed. COntinge

Handie

Cup

TTTTTTTT
Feb ar oay Jun Aug Sep

Fig. 8.15 : Cup &Handle

As can be seen from Figure 8.15, this price pattern
what looks like a cup, which is preceded by an upwardtrend
handle follows the cup formation and is formed by aOn:
price.
downward/sideways movement in the securitys formed
price movement pushes above the resistance Iines
6
trend aan
pward cotntinue. here is a wida rangina
this
(vpeof Dattern, with the span ranging froro
for morethan ayear.
fo
01ths
e45.....DoubleTopsand Bottom8
another well
chArt
known
itis considered to be one ofpattern
patternis that reliable
the nost signals
r e nr
o erersa/
This used. These patterns are forrned after a
commonly
signalto chartists that the trend is about to
and
tren Created when a price movement tests
sstaiiicCí pattern1s
The levels twice and is unable to break through.
resistance signal
sOT
or
is
attern
often used to intermediate and long-terrn
hs
Top#2 Doub'e Bottorm
Top#1

Bottorn #1 Bottom#2
DoubeTop

the left, while adouble bottom

pattern is shown on
Doubletop the right.
8.16: pattern is shown on
Pig,
top pattern in Figure 8.16, the price
ofthe double price level.
case above a certain
Inthe twice tried to move higher,the
ovement has
unsuccessful attempts pushingthe price
at double
twO heads lower. In the case of a
After
reverses and the
price to
movement has triedsecond
trend right), the price
(shown on the each timne.After the
bottom
but has found support enters a new trend
and
nger twice, security
the support, the
bounce off of
headsupward.
8.4.6........Triangles well-known chart patterns
of the most and
Triangles are some Symmetrical triangle, ascending
analysis. which vary in
uSed in technical are the three types of triangles, These chart
descending triangle what they imply.
and to
are constructed anywhere from a forth night
e way theyconsidered to last
Paterns are
several months. is a patternin which
Figure 8.17 neutral
symmetrical triangle in This patternis
The toward each other. confirmation of
tro trendlines converge upsideor downside is a the upper
in that a breakout to the ascending triangle,
atrend in that direction. In an
 this type of pattern, with the span ranging fron
morethan a year.
to Bottoms
DoubleTopsand
0nth8
another well
pattern
raerersal is known the rnost
itis considered to be one ofpattern that raliahle
aignais
chAI

This used These patterns are formed after a

commotnly
signalto chartists that the trend is about to
and is created when a price movement tests
pattern
resistancelevelstwice and is unable to break through
used to signal intermediate and long-terrm
often
is
Top#2 Doub'e Boton

Bottorn # Botom ÷2
DoubieTog

a double bottom
pattern is shown onthe left, while
Doubletop the right.
8.16: pattern is shown on 8.16,
ig. patternin Figure the price
double top
the case of the
tO move above a certain price level.
In twice tried
the price higher, the
has
-oTementunsuccessful attempts at pushing double
heads lower. In the case of a
Atertwo price movement has tried to go
reverses andthe price second
rend
(shown on the right), the tÉme. After the
bottom found support each new trend and
but has security enters a
rger twice, support, the
bounce off of the
beads upward.
84.6....Triangles well-known chart patterns
of the most and
Triangles are some Symmetrical triangle, ascending in
technical analysis.
types of triangles, which vary
chart
i9ed in triangle are the three they imply. These
BSCending constructed and what from a forth night to
are
waythey considered to last anywhere
patterns are
a patternin which
several months.
in Figure 8.17is patternisneutral
triangle
The symmetrical toward each other. This a confirmation of
tWO trendlines converge downsideis upper
nthat a breakout to the upside or triangle, the
ascending
trend that
in direction. In an
 TY BMS
Investment
trendline is flat, while thestock bottom trendlineAnalysis
and P
which indicates that the therefore has
more often in the past
accordingly once it breaches its an
it breached
shows
which chartists look for an upside as aresistance pward
trend reversal. This is generally thought of level
happens in a descending triangle, the breakout
The
lower . bullish
the upper trendline is descending.
bearish pattern where chartists look for a
8.4.7..........lag and Pennant
is This
ia
tdownsigenerrendlde ainley
When there is a sharp price
generally sideways price movement movement breaou.
arehorito-leTwedn
these two
patterns are the continuation patterns that
pattern is then completed upon another
the same direction as the move that sharp s
started 10rmed
price
the
patterns are generally thoughtto last from one to thena trend
Symmetrical Triangle

Breakout

Traders will enter into a

Descending Triangie
long position on a break
above the resistance

Trades will enter into

break
short position on a
below the support
Ascending Triangle

Fig, 8.17: Triangles

 Anah:sts

Flag

Pennant

Pennant & Flat

Fig.8.18: difference
8.18, there is little
from Figure main difference between these
be seen
can and a flag. The middle section of the chart
pennant
seen in the characterised by
As
betweerna
movements can be
middle section is symmetrical
pennant, the seen in a
price like what is pattern, on the other
trendlines, much
In a
pattern,
onthe flag convergence betweenthe
converging middle section with no continue when
triangle.
The
channel pattern, expected to
is
hand,
shows a cases, the trend
trendline.
both
trendlines.In abovethe upper
moves
price m
continuation or
8.4.8.....Wedge
the either a that
pattern can be
symmetrical triangleexcept
direction,
wedge chart a downward
The to
similar upward or sideways
pattern.Itis an shows a over
reversal pattern slants in generally to form
triangle wedges tend
the wedge symmetricaldifferenceis that sixmonths.
while the other threeand
movement:Theusuallybetween
periods,
longer 31
30
29
28
27
28
26
24
23
22
21
20
19
Faling VWedge
18
17

Pennant & Flat

Fig.8.19 :
 YY AMS
Inetment Analyese
There is some VAriAtion in the
considered most predictive of market length of the
measures Ar 200-daY And 53-weelk moving novemnent
averagea

Mar06 May06 Jul06

Ng. 8.22 : Moving Average
Sep06
S.5.2....... .Advance Decline Ratio/ Market
Breadth
The breadth of the market is a measure of
which movement in a market index is reflected he
movements of all the stocks in the market. Thewidely in etent
measure of breadth is the spread between the most iCOmn
heqi o:
that advance and declin in price. If number
advances
declines by a wide margin, then the market is viewed
stronger because the rally is widespread. These breadth
are reported daily in various financial News Papers umber
Some analysts cumulate breadth data each day as
Table 1.1. The cumulative breadth for each day is obtained ;a
adding that day's net advances (or declines) to the previOus dar
total. The direction of the cumulated series is then n
discern broad market trends. Analysts might use a moy
trends.
average of cumulative breadth to gauge broad
Advances Declines Net Advances Cumulative Breat
Day 54
748 54
1 802
227 331
917 640
-69 262
3 703 772
-348
1122 -610
4 512 -719
1004 -371
5 633
8.5.3.......Relative strength
measures the extent to
which a set
Relative strength
underperformed either the mars
Compute
has outperformed or strength is priceincke
Relative
whole or its particular industry. of the security to a ofRelan
calculating the ratio of the price relative strengthmeasurtd!
for the industry. For example, the would be
versus the Petroleum industry
 of Reliance Petro divided hy
ratioof the price inplies
In
Petroleumindustry index. Arising ratio
the
mOIemcnta

outperformingthe rest of the industry If

ofa hasbeen then this
ASSumed to persist over time,
lere/

Petro canbe
R
h e
e hance
strength Reliance Petro.
tobuy
relatinesigtnal strength of an industry relative to the
bea therelative
computed by tracking the ratio of the
Similarly,
can be index.
market market price
Nhole
inndextothe
price
ndustry .Trin statistic measure the strength of
used to
854.
volume is
sometimes
investor participation in a market
of
Market
orfall. Increased measure of the significance
riise viewed as a advances to be a
market
retreatis consider market are
&
Adranceor Technicians
price increases whenthey
movement.
of continued volume. Similarly, market
favourable sign trading associated with
the increased bearish when
ted with
more
considered more as
is defined
aSSOCia
rerersals are trin
statistic
VolumeThe
volume. declining/No.declining
higher
Volume adv./No. adv. trading volume in
Trin =
ratio of average
advancing issues. Ratios
is the volume in
Therefore, trin average falling stocks would
issues to because the advancing stocks,
declining bearish
considered volume than the
above 1.0are average of
have higher pressure. must be a seller
then selling every buyer,there not necessarily
indicating net for should example,
however,that rising market sellers. For could
Note, volume in a ofbuyers versus bearish,
Rising considered
stock. larger
imbalance
which is there is more buying
indicate a above 1.0, indicatingthat
statisticinterpreted as
atrin well be
equally decliningissues. to
8.5.5....... rated bonds
activityin Confldenceindex tradingof low confidence is
ratio of market they
index is a indicates that this is because in
Confidence ratio bullish, thereforeinvesting
bonds. High
sentiments are confidence
high ratedinvestor's upwardandSimilarly, low are
and going togoreturns. investors
high marketis high because they have
thinkthat willgive them sentimentsrated bondsas
bearish
risky bond
indicates high
mainly in upwards.
index money going
investing there themarket selling the share
confidence in
.Shortinterest to is the
low selling refers Shortinterest the
short account. in
8.5.6...
Stock markets in one's currently sold-short
In them
anyof
having shares of stock
ith0ut
number of
al
 1) RMS Inveetment Anolysie
md
market Somr techniciane interpet high evela of
Potfolin
bullish some as bearish. The bulliah perspeettive is
(i.e.,
ahorlthat,interen
all short sales nust be covered ahort-sellers
Purhase shares to return the ones theyforhave
interest represents latent future
sales Are covered, the demand
demand
created by thethe stocka
bearish interpretation share
ehoyreonwtiaelly).
rmahrm
force prices up. The short-sellers
of
shortpurc
tend to be
\argtinerte,reinntterTemyire
based on the fact that
sophisticated investors. Accordingly, increased n
reflects bearish sentiment by those investors "in theahor
would be a negative signal of the market's prospects
8.5.7 Put/call ratio
Call options give investors the right to
"exercise" price and therefore are a way of
buy a stock
at a
krowihich
increases. Put options give the right to
sell a betting stock fzet
on
stock at a
and therefore are a way of betting on stock price Exed prpriccR,
ratio of outstanding put options to ouutstanding call
called the put/call ratio. Because put options do
in
dewelcrelaoptsesio.ns
The
i
markets while call options do well in rising markets, fel ina
the ratio from historical norms are considèred
market sentiment and therefore predictive of market
to be a signal oi
deviations
Interestingly, however, a change in the ratio can be
bullish or a bearish interpretation. Many technicians
movementgvens a
increase in the ratio as bearish, as it indicates
growing
put options as a hedge against market declines. Thus, in interest
ratio is taken as a sign of broad investor pessimism and a cOmIng
market decline. Contrarian investors, however, believe that agoot
the market is bearish
time to buy is when the rest of because
stock prices are then unduly depressed. Therefore, they w
take an increase in the put/ call ratio as a signal of a hs
opportunity.
8.5.8...... S.preads
buntna
Spread refers to difference between selling price and
understood here that unike
price quoted for a share, it should be
there is no MRP for ashar.
any other commodity (say, Chocolate) he is holding at the hightes:
the seller would like to sell the shares
to buy the same shart
possible price and the buyer would like difference between pnt
the
the lowest possible price. When small it indicates a low spra
quoted by seller and buyer is very there is a willing buyer a
that
of stock price and indicates therefore seller would no te
the seller and sell
price quoted by by him to be able
to
required to lower the price offered bullish market.
indicates a
share, therefore such a situation
 seller'a quoted price
Tihnical
Anahes spread between bryer
this if the indicates that there is no willinghave to
against high, it -and he (i.e, the seller) rnaypricea are
As
buyer's offer is by seller turn indicates that the of
price
quoted which in indicates bearish serntirment
And
asking price,accordingly
the
at t h ereduce and
lower 5o
Jikelyto odd Lot Theory in lot (say a lot of 10 or of a
tradecd lot
if marketableit would
market.
shares are therefore
8.5.9,
stock
market,
case may be), place
share takes Marketable lot.
such
In shares as the trade for as
10O time such lot is known above example if
every 10, case of be known
or
share i s 10, multiples
ofmarketable lot, in wOuld
tradedin
Company it case
to a non
shares of the the market. But in
be lot refersholding 6 traded in share,
is cannot be marketable lot is of 1 demat
Odd
Oaestor because it of
system, the odd lot' in case
odd lot'trading called
thing
AS demat
there is no such
odd lot theory? lot theory refers to
of exactly is analysis' odd stock
therefore
Then what Technical are doing in the small
shareholders
trading. context of small assumption thatjudging
In the
activity that based on the wrong in pattern,
of is usually
the
kind theory informed and are particular
market. This least are
following a
buy share and
are
shareholders therefore if they
and the right time to
market shares, it's
the are selling
say they conducting actual
více versa. .Insider Trading
involved in are directly or
8.5.10.. people people wh0 some example of
means the
Insiders' or the
such business activity,
company
the employees of
of
business related to ranked done by
indirectly company, high trading
are directorsof the refers to shareshare. Normally
Insiders' trading
company, etc. Insider
company
in company's information available
the of the of critical generally
the insiders have highest level therefore they will
insiders would there disposal, would be going down
company at may
about the the company's share priceandaccordingly they
know when adversebusiness decision the information is broken
because of a shares they hold before company's share it
start selling the insiders are selling share and
market. Therefore, if about the company's
in the bearish sentiments as early as possible and vice
indicates share should be sold
therefore such
8.6.........DOW THEORY
versa.
the Dow
Theory the grandfather of trend analysis isestablished
(who
Dow
named after its creator, Charles Dow
Theory,
 TYBMS- Investment Analysls
and
today's Portfol o Man gom n
The Wall Street Journa). Many of
sophisticated methods are essentially variants more
of

af ec\teincahgpnriocalcyh
The Dow Theory posits three forces
prices :
sim-term
ultaneouslyDow's
i) The primary trend is the long
ii)
lasting from several months to
movement
several years. of st oele
Secondary or intermediate trends
term deviations of prices from
the
are
caused by prices,
These deviations are eliminated
prices revert back to trend values. via underlying trendshorne.t.
iüi) Tertiary or minor trends are
daily corrections wihen
Trends
importance.
fluctuations oi \it le.
Intermediate
Trend
Minor
Trend

Primary Trend

Fig. 8.23: Dow Theory Trends

Figure 8.23 represents these three components of stock price
movemnents. In this figure, the primary trend is upward, but
intermediate trends result in short-lived market declines lasting a
few weeks. The intraday minor trends have no long-run impact on
price.
Figure 8.24 depicts the course of the DJIA [Dow Jones
Industrial Average] during 1988. The primary trend is upward, as
evidenced by the fact that each market peak is higher than the
previous peak (point F versus D versus B). Similarly, each low is
higher than the previous low (E versus C versus A). This pattern
to
of upward-moving "tops" and *bottoms" is one of the key ways
identify the underlying primary trend. Notice in Figure 8.24 that,
trends still can
despite the upward primary trend, intermediateB through C, Or
lead to short periods of declining prices (points
through E).
 C

Sep Oct Nov

Jun Jul Aug
Mar Apr May
1880
Feb (DJIA] in 1988
Jan
Theory lndustrial Average lessons ofthe
e,8.24 : Dow don't forget the
evaluating the Dow Theory, Theory is básed on a notion
In hypothesis. The Dow Yet the EMH holds that if
eticient market
recurring price patterns. would attemptto profit
predictably investors
exploitable, many
would ultimately move stock
While
of patternis
predictability, which to self destruct.
any such
from and the trading strategy
describe a classic upward
cause that
prices certainly appears to whether we can see
Figure 8.24 one always must
wonder
patterns as they emerge is
primary
trend, Recognizing
the fact. Elliott wave
trend only after
farmoredifficult. Theory are the Theory,
Dow
variations on the waves. Likethe Dowdescribed
Recent Kondratieff can be
theory of stock prices cycles
theory and the Eliott waves is that and short-term wave
the idea
behind
patterns.
Long-term
complicated patternof price
according to
set of wave and result in a
by asuperimposed one can,
cycles, waves
are interpreting the Similarly, Kondratieff the
by
movements, but broad movements. asserted that
who
theory, predict Russian economist
market) moves in broad
the
are named
after a
therefore the stock Kondratieffwaves are
macro
economy (and and 60years.
The
although they are of
between 48 primary trend, is hard to evaluate
waves lastinganalogous to Dow's assertion years
therefore duration. Kondratieff's last about 50
cycles that century,which is
far longer however, becausedata pointsper
empirically, independent power of the theory.
predictive
Drovide only two test the
FUNDAMENTAL ANALYSIS
enough data to the tvo
hardly TECHNICAL V8. fundamental analysis are mentioned
and markets. As
Technical analysis n the financial
8.7.......
movement of a
of thought at the price
mainschoolsteechnical analysis
looks
itsfuture price
movements.
earlier,
and uses this
data to predict economic
hand, looks at between
Security
Fundamental analysis, on
the other differences
fundamentals. The main
known as
factors, Analysis are:
Technicaland Fundamental
 TBMS- Investment Analycie
and
) Finaneial Statementa va. Charts : At Portfolio
level, fundamental analyst
statements while a technical starts
analyst
withthethemOst Mon gbaaiemo
ap roac(ihnaenseial
security from the charts. A
fundamental at
incomeanalythest tries
determine a company's value by
sheet, cash flow statement and looking t
a

financial terms, an analyst

attempts to m balare In
company's intrinsic value. In this
statement.
price meofasure
decisions are fairly easy to make - approach, a
trades below its intrinsic
if the
value, it's a good
Although this is an oversimplification iinnvveesstmtrneesrnttOt.ck
a

simplestapri(tfeunmndciaemnptnlsee)nta
analysis goes beyond just the financial
for the purposes of our study, this
bu
tråe.
Technical traders, on the other hand, believe holds
reason to analyze a company's
these are all accounted for in the
there
fundamentals because is no
believe that all the stock's
Technicians
about a stock can be found in its charts. information they prineedce.
ii) Time Horizon : Fundamental analysis takes a
approach to analysing the market while
analysis takes the short term road to judge a
ltoeng-echnitercmal
While technical analysis can be used On a security.ot
weeks, days or even minutes, fundamental timeframeoften
analysis
looks at data over a number of years. The
timeframes that these two approaches use are driven h: dif erent
nature of the investing style which they follow. It can take
a long time for a company's value to be reflected in the
market, so when a fundamental analyst estimates
intrinsic value, a gain is not realised until the stocks
market price rises to its "true" value. This type of
investing is called value investing and assumes that the
short-term market is wrong, and the price of a particular
stock will correct itself over the long run. This "long run'
can represent a timeframe of as long as several years, in
SOme cases. Furthermore, the numbers that a
fundamentalist analyse are only released over long
periods of time [this can be compared with the dividend
discount model of valuating which discounts all tht
future earnings that are to be received in long er
future]. Financial statements are filed quarterly
on a
daily
changes in earnings per share don't emerge shouldbe
It
basis like price and volume information. the actual
understood that fundamentals are
 TechnicalAnalsis 335

aharacteristics of a business and cannot or would not

change immediately. For C.g. new management can't
implement sweeping changes immediately and it takes
time to create new
supply chains, etc. products, carnpaigns,
marketing
Part of the reason
analysts use a that fundarmental
the data they long-term timeframe,
use to analyse
therefore, is because
a stock is generated much
more slowly than the price and
technical analysts. volume data used oy
iil) Trading Versus
Investing :
more short term in nature thatNot only is technical analysis
the goals of a purchase (or sale) fundamental analysis, but
of a
different for each approach, In general, stock are usually
technical analySIS
is used Tor a trade, whereas
to make an fundamental analysis is used
can increaseinvestment.
assets they believe
in value, Investors buy
while traders buy assets they
believe they can sell to somebody else at a greater Price.
The line between a trade and an
investment can De
unclear, but it does characterise a difference between the
two thoughts.
8.8....CRITICISM OF TECHNICAL ANALYSIS
Some critics see technical analysis as some kind of taboo
or black magic. That's one of the reasons that, technical analysis
has only recently begun to enjoy some mainstream standing.
While most analysts in stock market focus on the fundamental
side, just about any major brokerage now employs technical
analysts as well.
Much of the criticism of technical analysis has its roots in
academic theory - specifically the efficient market hypothesis
(EMH). This theory says that the market's price is always the
reflected in
correct one - any past trading information is already
the price of the stock and, therefore, any analysis to find
undervalued securities is useless.
information
As per EMH in an Bfficient Market system every available
movement is freely
be it about the company or its price
to all the
investors and therefore there cannot be any investor
outperformthe returns earned by other investors i.e. the
who can
whole market system and therefore as per EMH there is no
undervalued or Overvalued securities all securities are correctly
therefore stock prices will follow a random walk
priced andtrend.
instead of a right answer as to who is correct. There are
There is nomade on both sides and, therefore, it's up to you
argumentstobe
homeworkand determine your own philosophy.
the
to do
 TYBMS Investment Analyeist and Portfollo
8.9.....*. CAN FUNDAMENTAL & TECHNICAL ANALYSES BE Management
USED SIMULTANEOUSLY?
Although technical analysis and fundamental
seen by many as total opposites the sugar and analysis are
diabetes of
investing many market participants have experienced great
success by combining the two. For example, some
analysts use technical analysis techniques to figure out the best
time to buy an undervalued security. By timing entry into a
fundamental
security, the gains on the investment can be greatly improved
Alternatively, some technical traders might look at
fundamentals (for e.g. reputation of the management, etc.) to add
strength to a technical signal. For example, if a sell signal is given
through technical patterns and indicators, a technical trader
might look to reafirm his or her decision by looking at some ker.
fundamental data. Oftentimes, incorporating best of the t
the
thoughts [i.e. the fundamentals and technicals] can provide
best-case scenario for a trade.
technical and
While mixing some of the components of
devoted groune t
fundamental analysis is not liked by the most understandbst
to at least
each school, but it is always advised
schools of thought.
8.10.. .EXEROCISE
1. Writea note on :
techniques, (c) Chart
(a) Technical Analysis, (b) ChartingSupport & Resistance.
patterns, (d) Moving Averages, (e)
Technical vs. Fundamental analysis, (h) Types of Trends &
(g) i) Technical Vs. Fundamental
(i) Trin factor,
Trend Length,
Analysis, (k) Dow theory technical indicators?
What are various
2.
Technical Analysis market movements happen 90%
3. "As per factors
psychological factors and 10% due to logical
due to
explain. technical analysis?
4. What are the limitations of
5. Choose the correct option : movements of shares
analysis price
a) As per technical
depend on:
share, (ii) Supply of share, (iil) Volume of
(i) Demand of share
share, (iv) Demand & Supply of the of a share.
b) Technical analysis provides
value of the share, (ii) Price behaviour o
(i) Intrinsic
Non of the above
share, (iii) Supply of the share, (iv)
(Ans. : a- iv; b - ii)