EXECUTIVE SUMMARY

The project undertaken is “A Study on Technical Analysis of S&P CNX NIFTY stocks”. The

project emphasizes on Technical Analysis of stocks. The Chart patterns and indicators used as a

part of the Technical Analysis are described in detail. Further, the project also highlights the

S&P CNX NIFTY stocks’ performance. The project also provides an insight into the different

components of Securities Market in India like Primary Market, Secondary Market and Derivative

market. The project also highlights certain other vital aspects pertaining to the securities market

like the Role of regulatories, IPO process etc.

The CNX NIFTY is a well diversified 50 stock index accurately reflecting the overall market

conditions. The reward to risk ratio of CNX Nifty is higher than other leading indices, making it

a more attractive portfolio hence offering similar returns, but at lesser risk.CNX Nifty is based

upon solid economic research and is well respected internationally as a pioneering effort in better

understanding how to make a stock market index. CNX Nifty Index is computed using free float

market capitalization method, wherein the level of the index reflects the total free float market

value of all the stocks in the index relative to particular base market capitalization value. CNX

Nifty can be used for a variety of purposes such as benchmarking fund portfolios, launching of

index funds, ETF’s and structured products. Index Variants are CNX Defty, CNX Nifty Total

Return Index and CNX Nifty Dividend Index.

The Objectives of the study include understanding the Securities market in India. To analyze the

role of Equities in Indian financial system and to determine the best stocks amongst the NIFTY

50 stocks for investment. The project taken up can be divided into various phases. In the early

phase of the project the entire structure of the Indian Securities market was studied. Next, study

was on how technical analysis of stocks is done. Then, the analysis of the CNX NIFTY stocks

was done using certain selected indicators of Technical Analysis.

Since the project carried out is descriptive and analytical in nature, various documents were

referred. The data collection was done through secondary sources like websites and also from

personal interaction with the guide and other officials. At the same time related articles,

magazines, in-house journals of the India Bulls were referred.

INTRODUCTION

1.1 OVERVIEW OF THE INDIAN SECURITIES MARKET

INTRODUCTION

The Indian securities market, considered one of the most promising emerging markets, is among

the top eight markets of the world. The Stock Exchange, Mumbai, which was established in 1875

as “The Native Share and Stockbrokers Association” (a voluntary non-profit making

association), has evolved over the years into its present status as the premier Stock Exchange in

the country. At present 24 stock exchanges operate all over India. These stock exchanges provide

facilities for trading securities, Securities markets provide a common platform for transfer of

funds from the person who has excess funds to those who need them. Securities market is

regulated by the Securities& Exchange Board of India (SEBI).

COMPONENTS OF SECURITY MARKET

The major components of the securities market are listed below:

• Securities-Shares, Bonds, Debentures, Futures, Options, Mutual Fund Units

• Intermediaries-Brokers, Sub brokers, Custodians, Share transfer agents, Merchant Bankers

• Issuers of securities-Companies, Bodies corporate, Government, Financial Institutions, Mutual

funds, Banks

• Investors-Individuals, Companies, Mutual funds, Financial Institutions, Foreign Institutional

Investors

• Market Regulators-SEBI, RBI (to some extent), Department of Company Affairs

TYPES OF SECURITIES MARKETS

In the contest of equity products, which this publication seeks to cover in depth, the following

markets could be defined:

• Primary Market

• Secondary Market

• Derivatives market

Markets can also be broadly classified into equity and debt markets. Debt markets are

characterized

Currently by a large institutional presence, though an attempt is being made to attract retail

participation in recent times. Debt markets trade in Government securities, Treasury Bills,

Corporate Bonds and other debt instruments while Equity markets deal mainly in equity shares

and to a limited extent in preference shares and company debentures. Futures and Options in

indices and equity shares are of a relatively recent origin and form part of equity markets.

INTERMEDIARIES

Intermediaries provide various services to investors and issuers and have grown to become

among both powerful and knowledgeable due to due to substantial growth of securities markets

over the last century. A large variety and number of intermediaries provide intermediation

services in the Indian securities market.

ISSUERS OF SECURITIES

Every organisation, whether if be a company, institution or a Government body needs funds for

various operations. Organisations issue securities in the primary market depending on their

needs. The Securities market in India is an important source for corporate and government. The

corporate sector does depend significantly on equity and debt markets for meeting its funding

requirements though the share of equity markets has been decreasing over the recent years in

view of the rather dull primary market.

INVESTORS

Investors are those who have excess funds with them and want to employ it for returns. Indian

securities market has more than 20 million investors, comprising Individuals, Companies,

Mutual funds, Financial Institutions, Foreign Institutional Investors.

A review of shareholding pattern of all BSE Companies shows that, more than 50% of the shares

are held by the promoters of companies, whereas 15% by Institutional Investors.

After liberalization of the economy investments by foreign institutional investors have shown a

steady increase. Foreign direct investment has increased from Rs. 174 crores in 1990-91 to Rs.

10,686 crores in 2000-01. Portfolio Investment has shown a faster growth. It is increased from

Rs 11 crores in 1990-91 to Rs. 12,609 crores in 2000-2001.

MARKET REGULATORS

Securities market is regulated by following governing bodies:

1. Securities and Exchange Board of India (SEBI)

2. Department of Economic Affairs (DEA)

3. Department of Company Affairs (DCA)

4. Reserve Bank of India

5. Stock exchanges

Significant among the legislations for the securities market are the following:

1.The SEBI Act, 1992, which establishes SEBI to protect investors and development and

regulate securities market. All the powers under this act are exercised by SEBI.

2.The Companies Act, 1956 which set out the code of conduct for the corporate sector in relation

to issue, allotment and transfer of securities, disclosures to be made in public issues and non-

payment of dividend. Powers under this Act are exercised by SEBI in case of listed public

companies and public companies proposing to get their securities listed.

3.The Securities Contract (Regulation) Act, 1956, which provide for regulation of transaction ins

ecurities through control over stock exchanges, Most of lthe powers under this act are exercised

by Department of Economic Affairs (DEA), some are concurrently exercised by DEA and SEBI

and a few powers by SEBI.

4.The Depository Act, 1996, which provides for electronic maintenance and transfer of

ownership of demateralised securities, SEBI administers the rules and regulation under this Act.

The Securities and Exchange Board of India was established in 1988 to regulate and develop the

growth of the capital market. SEBI regulates the working of stock exchanges and intermediaries

such as stock brokers and merchant bankers, accords approval for mutual funds, and registers

Foreign Institutional Investors who wish to trade in Indian scrips. Section 11(1) of the Sebi Act

provides that it shall be the duty of the Board to protect the interests of investors securities and ot

promote the development of, and to regulate the securities market, by such measures as it thinks

fit.

SEBI regulates the business in stock exchanges and any other securities markets and the working

of collective investment schemes, including mutual funds, registered by it. SEBI promotes

investor’s education and training of intermediaries of securities market. It prohibits fraudulent

and unfair trade practices relating to securities markets, and insider trading in securities, with the

imposition of monetary penalties, on erring market intermediaries, It also regulates substantial

acquisition of shares and takeover of companies and can call for information from, carry out

inspection, conduct inquiries and audits of the stock exchanges and intermediaries and self

regulatory organizations in the securities market.

SEBI has introduced various reforms including improved transparency, computerisation,

enactments against insider trading, improved capital adequacy, imposed restrictions on forward

trading, and enacted provisions to encourage corporate membership in the stock exchanges.

Stock exchanges have also laid down strict compliance measures covering detection of irregular

trading practices through sophisticated surveillance systems, margining, trading volume controls

and set up investor protection funds, Stock exchanges ensure compliance of brokers on a

continuous basis through inspection and other measures.

PRIMARY MARKET

A market that issues new securities on an exchange. Companies, governments and other groups

obtain financing through debt or equity based securities. Primary markets are facilitated by

underwriting groups, which consist of investment banks that will set a beginning price range for

a given security and then oversee its sale directly to investors. 

Also known as "new issue market" (NIM).

hMethods of issuing securities in the primary market are:

Initial public offering;

Rights issue (for existing companies)

Preferential issue

Kinds of issues

The different kinds of issues which can be made by an Indian company in India:

a) Public Issue

i. Initial Public Offer

ii. Further Public Offer

b) Right Issue

c) Bonus Issue

d) Private Placement

PUBLIC ISSUE

i) INITIAL PUBLIC OFFERING

An Initial Public Offering (IPO) is the selling of securities to the public in the primary market. It

is when an unlisted company makes either a fresh issue of securities or an offer for sale of its

existing securities or both for the first time to the public. This paves way for listing and trading

of the issuer’s securities. The sale of securities can be either through book building or through

normal public issue.

Reasons for IPO

1. Need for funds

2. Disinvestments of public sector units

3. Banks to enhance their capital adequacy

4. Expansion or diversification

5. Finance specific projects for a specific objective

BENEFITS OF GOING PUBLIC

The potential advantages that seem to prod companies to go public are as follows:

1) Access to Capital – The principal motivation for going public is to have access to larger

capital. A company that does not tap the public financial market may find it difficult to grow

beyond a certain point for want of capital.

2) Respectability – Many entrepreneurs believe that they have “arrived” in some sense if

their company goes public because a public company may command greater respectability.

Competent and ambitious executives would like to work for growth. Other things being equal,

public companies offer greater growth potential compared to non-public companies. Hence, they

can attract superior talent.

3) Window of Opportunity – As suggested by Jay Ritter and others that there are periods

in which stocks are overpriced. Hence, when a non-public company recognizes that other

companies in its industry are overpriced, it has an incentive to go public and exploit that

opportunity.

4) Benefit of Diversification – When a firm goes public those who have investment in it –

original owners, investors, managers, and others – can cash out of the firm and build a

diversified portfolio.

5) Signals from the Market – Stock prices represent useful information to the managers.

Every day, investors render judgments about the prospects of the firms. Although the market

may not be perfect, it provides a useful reality check.

6) Complements Product Marketing: Going public attracts media attention. Newspapers

and magazines are most likely to focus on public companies on which information is readily

available. This publicity can be harnessed and used towards marketing the product of the

company.

7) Competitive position: Many companies use their increased availability of capital as a

public company to enhance their competitive position. Additional capital available to a public

company permits greater market penetration.

8) Expands Business Relationship: Once a company is public company, information on

that company is readily available. Prospective suppliers, distributors and partners could easily

garner information and forge a relationship with such company.

9) Ability to take advantage of market price fluctuations: Once public, a company can

take advantage of market price fluctuations to sell stock when the markets are hot, buy back the

stock when the market is cold. This can often be an effective and low cost way to raise

significant capital.

IPO PROCESS

1) Appointment of Investing Banker

When a company is aiming to go public, at first it hires an investment bank to do the

underwriting, the way of raising money through equity or debt, functions associated with the

issue. Although, a company itself also may sell its shares but, usually an investment bank is

selected for that purpose. Underwriters act as intercessors between the public, who are investing,

and the companies.

The investment bank and the company will first initiate the process of deal negotiation. The main

discussing issues are the money amount that the company is going to raise, security type to be

issued and all the other details involved with the underwriting agreement.

2) Preparation of Red Herring Prospectus

Once the deal gets finalized, the investment bank sets a registration statement called Red

Herring Prospectus which will be submitted to the Securities and Exchange Commission. The

registration statement consists of information regarding the offering and also other company’s

information like, background of the management, financial statements, legal issues etc.

There is no price or issue size stated in the Red Herring. It is updated several times before being

called the final prospectus. It is called so because it contains a passage in red that states the

company is not attempting to sell its shares before the registration is approved by the SEC (Stock

Exchange Commission).

3) SEBI Approval

Then the Securities and Exchange Commission (SEC) needs a cooling off period during which it

will examine all the submitted documents and make sure that all information regarding the deal

have been given to them. After getting the SEC's approval, a date is going to be fixed on which

the company will offer the stock to the public.

4) Deciding on price band and share number

Then the company and the underwriter meet to decide the price of the stock. The price of the

share is determined through book building process. This decision depends highly on the current

market condition.

Book building process is defined as the process by which an underwriter attempts to determine

at what price to offer an IPO based on demand from institutional investors.

An underwriter "builds a book" by accepting orders from fund managers indicating the number

of shares they desire and the price they are willing to pay.

5) Making shares available to public

The stocks are sold in the market and money is raised from the investors.

ii) FURTHER PUBLIC OFFER

When already listed company makes either a fresh issue of securities to the public or an offer for

sale to the public, it is called FPO.

RIGHTS ISSUE

A rights issue is a way in which a company can sell new shares in order to raise capital. Shares

are offered to existing shareholders in proportion to their current shareholding, respecting their

pre-emption rights. The price at which the shares are offered is usually at a discount to the

current share price, which gives investors an incentive to buy the new shares — if they do not,

the value of their holding is diluted.

A rights issue to fund expansion can usually be regarded somewhat more optimistically,

although, as with acquisitions, shareholders should be suspicious because management may be

empire-building at their expense (the usual agency problem with expansion).

The rights are normally a tradable security themselves (a type of short dated warrant). This

allows shareholders who do not wish to purchase new shares to sell the rights to someone who

does. Whoever holds a right can choose to buy a new share (exercise the right) by a certain date

at a set price.

Some shareholders may choose to buy all the rights they are offered in the rights issue. This

maintains their proportionate ownership in the expanded company, so that an x% stake before

the rights issue remains an x% stake after it. Others may choose to sell their rights, diluting their

stake and reducing the value of their holding.

If rights are not taken up the company may (and in practice does) sell them on behalf of the

rights holder.

BONUS SHARES

The term bonus means an extra dividend paid to shareholders in a joint stock company from

surplus profits. When a company has accumulated a large fund out of profits - much beyond its

needs, the directors may decide to distribute a part of it amongst the shareholders in the form of

bonus. Bonus can be paid either in cash or in the form of shares. Cash bonus is paid by the

company when it has large accumulated profits as well as cash to pay dividend. Many a time, a

company is not in a position to pay bonus in cash in spite of sufficient profits because of

unsatisfactory cash position or because of its adverse effects on the working capital of the

company. In such a position, the company pays a bonus to its shareholders in the form of shares;

a free share thus issued is known as a bonus share.

A bonus share is a free share of stock given to current/existing shareholders in a company, based

upon the number of shares that the shareholder already owns at the time of announcement of the

bonus. While the issue of bonus shares increases the total number of shares issued and owned, it

does not increase the value of the company. Although the total number of issued shares

increases, the ratio of number of shares held by each shareholder remains constant.

Whenever a company announces a bonus issue, it also announces a "Book Closure Date" which

is a date on which the company will ideally temporarily close its books for fresh transfers of

stock. Read "Book Closure" for a better understanding.

An issue of bonus shares is referred to as a bonus issue.

Depending upon the constitutional documents of the company, only certain classes of shares may

be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes.

bonus share is free share in fixed ratio to the shareholders. for exp..reliance ind. ltd. issue bonus

share in 1:1 ratio and Rs.13.00 as dividend/share

Sometimes a company will change the number of shares in issue by capitalizing its reserve. In

other words, it can convert the right of the shareholders because each individual will hold the

same proportion of the outstanding shares as before. Main reason for issuance is the price of the

existing share has become unwieldy.

Purpose: Usually bonus shares are issued with the intent of rewarding the investor, although

having said that the ex-bonus (post bonus) price of the share is adjusted to bonus ratio. So for

e.g, if the price of a share before bonus is Rs.100 and a bonus of 1:1 is issued, then ex-bonus

share price would adjust to Rs. 50, which means that the total market value will remain the same.

There is generally a case where the price of the share increases after bonus effect is incorporated.

Ratios' Impact:

The main financial effect of bonus share is that it increases the number of shares outstanding and

reduces the earnings per share (EPS). Basic EPS = (Net Profit after tax / no. of equity shares

outstanding).

PRIVATE PLACEMENT

Private placement occurs when a company makes an offering of securities not to the public, but

directly to an individual or a small group of investors. Such offerings do not need to be registered

with the Securities and Exchange Commission (SEC) and are exempt from the usual reporting

requirements. Private placements are generally considered a cost-effective way for small

businesses to raise capital without "going public" through an initial public offering (IPO).

"Although most business owners dream of taking their company public someday, many have had

to wait years for a traditional public offering," Gary D. Zeune and Timothy R. Baer explained in

an article for Corporate Cashflow Magazine. "For them, a private placement of equity or debt has

been a quicker, less expensive way to raise a limited amount of capital from a limited number of

investors. A private placement has been appropriate when a company still lacks the financial

strength or reputation to appeal to a broad base of investors and cannot afford the expense of a

public offering."

Advantages and Disadvantages

Private placements offer small businesses a number of advantages over IPOs. Since private

placements do not require the assistance of brokers or underwriters, they are considerably less

expensive and time consuming. In addition, private placements may be the only source of capital

available to risky ventures or start-up firms. "With loan criteria for commercial bankers and

investment criteria for venture capitalists both tightening, the private placement offering remains

one of the most viable alternatives for capital formation available to companies," Andrew J.

Sherman wrote in his book The Complete Guide to Running and Growing Your Business.

A private placement may also enable a small business owner to hand-pick investors with

compatible goals and interests. Since the investors are likely to be sophisticated business people,

it may be possible for the company to structure more complex and confidential transactions. If

the investors are themselves entrepreneurs, they may be able to offer valuable assistance to the

company's management. Finally, unlike public stock offerings, private placements enable small

businesses to maintain their private status.

Of course, there are also a few disadvantages associated with private placements of securities.

Suitable investors may be difficult to locate, for example, and may have limited funds to invest.

In addition, privately placed securities are often sold at a deep discount below their market value.

Companies that undertake a private placement may also have to relinquish more equity, because

investors want compensation for taking a greater risk and assuming an illiquid position. Finally,

it can be difficult to arrange private placement offerings in multiple states.

Fresh issues of shares and other securities are effected though the Primary market. It provides

issuers opportunity to issue securities, to raise resources to meet their requirements of business.

Equity issues can be effected at face value or at discount/premium. Issues at discounts are rare

and almost unheard of. Issuers can issue the securities in domestic market and/or international

market through ADR/GDR/ECB route.

SECONDARY MARKET

The secondary market is the financial market for trading of securities that have already been

issued in an initial private or public offering. Alternatively, secondary market can refer to the

market for any kind of used goods. In the secondary market, securities are sold by and

transferred from one investor or speculator to another. It is therefore important that the secondary

market be highly liquid and transparent. Before electronic means of communications, the only

way to create this liquidity was for investors and speculators to meet at a fixed place regularly.

ROLE OF THE SECONDARY MARKET

For the general investor, the secondary market provides an efficient platform for trading of his

securities. For the management  of the company, Secondary equity markets serve as a monitoring

and control conduit—by facilitating value-enhancing control  activities, enabling implementation

of  incentive-based management contracts, and aggregating-information(via price discovery) that

guides management decisions.

LISTING OF SECURITIES

Listing means admission of securities of an issuer to trading privileges (dealings) on a stock

exchange through a formal agreement. The prime objective of admission to dealings on the

exchange is to provide liquidity and marketability to securities, as also to provide a mechanism

for effective control and supervision of trading.

TRADING OF SECURITIES

Trading securities is the act of buying and selling securities with the intention of making a quick

profit. Brokerage firms and investment advisers recommend buying securities for the anticipated

long-term appreciation of the company. Trading securities involve the same stocks and bonds

available to all investors on public exchanges. The difference is trading securities are timed by

investors to buy low and sell high in short time frames. While all securities can be traded in this

fashion, some securities have a natural ebb and flow that can be traded more regularly. For

example, retail store chains expect higher fourth-quarter earnings as a result of holiday shopping

that may lead investors to time early fourth quarter buying to be sold in the early first quarter.

Investor has the right to sell the securities investor hold at a price and time investor may choose.

Investor can do so personally with another person or through a recognized stock exchange.

Similarly, investor has the right to buy securities from anyone or through a recognized stock

exchange at a mutually acceptable price and time.

Whether it is a sale or purchase of securities, affected directly by investor or through an

exchange, all trades should be executed by a valid, duly completed and stamped transfer deed.

If investor chooses to deal (buy or sell) directly with another person, investor is exposed to

counter party risk, that is, the risk of non-performance by that party. However, if investor deals

through a stock exchange, this counter party risk is reduced due to trade/settlement guarantee

offered by the stock exchange mechanism. Further, investor also has some protection against

defaults by investor broker.

When investor operates through an exchange, investor has the right to receive the best price

prevailing at that time for the trade and the right to receive the money or the shares on time.

Investor also has the right to receive a contract note from the broker confirming the trade and

indicating the time of execution of the order and other necessary details of the trade.

Investor also has the right to receive good delivery and the right to insist on rectification of bad

delivery. If investor has a dispute with investor broker, investor can resolve it through arbitration

under the aegis of the exchange.

If investor decides to operate through an exchange, investor has to avail the services of a SEBI

registered broker/sub-broker. Investor has to enter into a broker-client agreement and file a client

registration form. Since the contract note is a legally enforceable document, investor should

insist on receiving it.

Investor has the obligation to deliver the shares in case of sale or pay the money in case of

purchase within the time prescribed. In case of bad delivery of securities by investor, investor

has the responsibility to rectify them or replace them with good ones.

Advantages of Secondary Market

1) Mobilize savings

2) Investment Opportunities

3) Investment Advice

4) Improves Corporate Governance

SETTLEMENT PROCESS

1) Trade details from Exchange to NSCCL (National Securities Clearing Corporation

Ltd)

2) NSCCL gives complete trade details to custodian / clearing member who affirm back.

Based on the affirmation NSCCL applies multilateral netting and determines

obligations.

3) After determining the obligations, the pay in advice of funds / securities takes place

4) If the transaction is related to funds, clearing banks will complete the transaction

5) If it is a shares related transaction, the instructions to depositories will be given to

perform the necessary transaction through depositary participants

6) Pay-in of securities (NSCCL advises depository to debit pool account of

custodians/CMs and credit its account and depository does it)

7) Pay-in of funds(NSCCL advises Clearing Banks to debit account of custodians/CMs

and credit its account and clearing bank does it)

8) Pay-out of securities (NSCCL advises depository to credit pool account of

custodians/CMs and debit its account and depository does it)

9) Pay-out of funds (NSCCL advises Clearing Banks to credit account of

custodians/CMs and debit its account and clearing bank does it)

10) Depository informs custodians/CMs through DPs.

11) Clearing Banks inform custodians/CMs.

DERIVATIVES MARKET

A derivative picks a risk or volatility in a financial asset, transaction, market rate, or

contingency, and creates a product the value of which will change as per changes in the

underlying risk or volatility. The idea is that someone may either try to safeguard against such

risk (hedging), or someone may take the risk, or may engage in a trade on the derivative, based

on the view that they want to execute. The risk that a derivative intends to trade is called

underlying.

A derivative is a financial instrument, whose value depends on the values of basic

underlying variable. In the sense, derivatives is a financial instrument that offers return based on

the return of some other underlying asset, i.e the return is derived from another instrument.

The best way will be take examples of uncertainties and the derivatives that can be structured

around the same.

• Stock prices are uncertain - Lot of forwards, options or futures contracts are based on

movements in prices of individual stocks or groups of stocks.

• Prices of commodities are uncertain - There are forwards, futures and options on

commodities.

• Interest rates are uncertain - There are interest rate swaps and futures.

• Foreign exchange rates are uncertain - There are exchange rate derivatives.

• Weather is uncertain - There are weather derivatives, and so on.

Derivative products initially emerged as a hedging device against fluctuations in

commodity prices, and commodity linked derivatives remained the sole form of such products

for almost three hundred years. It was primarily used by the farmers to protect themselves

against fluctuations in the price of their crops. From the time it was sown to the time it was ready

for harvest, farmers would face price uncertainties. Through the use of simple derivative

products, it was possible for the farmers to partially or fully transfer price risks by locking in

asset prices.

From hedging devices, derivatives have grown as major trading tool. Traders may execute their

views on various underlings by going long or short on derivatives of different types.

MAJOR TYPES OF DERIVATIVES

Derivative contracts have several variants. Depending upon the market in which they are traded,

derivatives are classified as 1) exchange traded and 2) over the counter. The most common

variants are forwards, futures, options and swaps.

Forwards:

A forward contract is a customized contract between two entities, where settlement takes

place as a specific date in the future at today’s predetermined price.

Ex: On 1st June, X enters into an agreement to buy 50 bales of cotton for 1st December at

Rs.1000 per bale from Y, a cotton dealer. It is a case of a forward contract where X has to pay

Rs.50000 on 1st December to Y and Y has to supply 50 bales of cotton.

Futures:

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such

as a physical commodity or a financial instrument, at a predetermined future date and price.

Futures contracts detail the quality and quantity of the underlying asset; they are standardized to

facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of

the asset, while others are settled in cash. The futures markets are characterized by the ability to

use very high leverage relative to stock markets. 

Options:

Options are of two types – call and put. Calls give the buyer the right but not the obligation to

buy a given quantity of the underlying asset, at a given price on or before a given future date.

Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying

asset at a given price on or before a given date.

Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to

this effect in May 2000 for trading in index futures, Currently, the Indian markets provide equity

derivatives of the following types:

• Index Futures-Two Indices

• Stock Futures-Twenty Nine stocks

• Index Options-Two Indices

• Stock Options-Twenty Nine Stocks

Derivatives help to improve market efficiencies because risks can be isolated and sold to those

who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can

be managed independently. Corporations can keep the risks they are most comfortable managing

and transfer those they do not want to other companies that are more willing to accept them.

From a market-oriented perspective, derivatives offer the free trading of financial risks.

Financial derivatives have changed the face of finance by creating new ways to understand,

measure, and manage financial risks. Ultimately, derivatives offer organizations the opportunity

to break financial risks into smaller components and then to buy and sell those components to

best meet specific risk-management objectives. Moreover, under a market-oriented philosophy,

derivatives allow for the free trading of individual risk components, thereby improving market

efficiency. Using financial derivatives should be considered a part of any business’s risk-

management strategy to ensure that value-enhancing investment opportunity can be pursued.

EQUITY MARKET

Publicly traded equities form a significant source of capital for firms, and equity markets are a

key part of the process of allocating capital among competing uses in our economy, Through

issuance of equities, companies enable a broad set of investors to share in the risk and reward of

economic activities.

This market in which shares are issued and traded, either through exchanges or over-the-counter

markets. Also known as the stock market, it is one of the most vital areas of a market economy

because it gives companies access to capital and investors a slice of ownership in a company

with the potential to realize gains based on its future performance.

Blue Chip: A nationally recognized, well-established and financially sound company. Blue chips

generally sell high-quality, widely accepted products and services. Blue chip companies are

known to weather downturns and operate profitably in the face of adverse economic conditions,

which helps to contribute to their long record of stable and reliable growth.

CONCEPT OF DEMATERIALIZATION

Dematerialization is the process by which a client can get physical certificates converted into

electronic balances.

An investor intending to dematerialize its securities needs to have an account with a DP

(Depositary Participant). The client has to deface and surrender the certificates registered in its

name to the DP. After intimating NSDL (National Securities Depositary Limited) electronically,

the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/

R&T agent electronically, using NSDL Depository system, about the request for

dematerialization. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as

the holder of the securities (the investor will be the beneficial owner) and communicates to

NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits

the securities in the depository account of the Investor with the DP.

The client (registered owner) will submit a request to the DP in the Dematerialization

Request Form   for dematerialization, along with the certificates of securities to be

dematerialized. Before submission, the client has to deface the certificates by writing

"SURRENDERED FOR DEMATERIALIZATION".

The DP will verify that the form is duly filled in and the number of certificates, number

of securities and the security type (equity, debenture etc.) are as given in the DRF. If the

form and security count is in order, the DP will issue an acknowledgement slip duly

signed and stamped, to the client.

The DP will scrutinize the form and the certificates. This scrutiny involves the following

o Verification of Client's signature on the dematerialization request with the

specimen signature (the signature on the account opening form). If the signature

differs, the DP should ensure the identity of the client.

o Compare the names on DRF and certificates with the client account.

o Paid up status

o ISIN (International Securities Identification Number)

o Lock - in status

o Distinctive numbers

In case the securities are not in order they are returned to the client and acknowledgment

is obtained. The DP will reject the request and return the DRF and certificates in case:

o A single DRF is used to dematerialize securities of more than one company.

o The certificates are mutilated, or they are defaced in such a way that the material

information is not readable. It may advise the client to send the certificates to the

Issuer/ R&T agent and get new securities issued in lieu thereof.

o Part of the certificates pertaining to a single DRF is partly paid-up; the DP will

reject the request and return the DRF along with the certificates. The DP may

advise the client to send separate requests for the fully paid-up and partly paid-up

securities.

o Part of the certificates pertaining to a single DRF is locked-in, the DP will reject

the request and return the DRF along with the certificates to the client. The DP

may advise the client to send a separate request for the locked-in certificates.

Also, certificates locked-in for different reasons should not be submitted together

with a single DRF

In case the securities are in order, the details of the request as mentioned in the form are

entered in the DPM (software provided by NSDL to the DP) and a Dematerialization

Request Number (DRN) will be generated by the system.

The DRN so generated is entered in the space provided for the purpose in the

dematerialization request form.

A person other than the person who entered the data is expected to verify details recorded

for the DRN. The request is then released by the DP which is forwarded electronically to

DM (DM - Depository Module, NSDL's software system) by DPM.

The DM forwards the request to the Issuer/ R&T agent electronically.

The DP will fill the relevant portion viz., the authorisation portion of the demat request

form.

The DP will punch the certificates on the company name so that it does not destroy any

material information on the certificate.

The DP will then despatch the certificates along with the request form and a covering

letter to the Issuer/ R&T agent.

The Issuer/ R&T agent confirms acceptance of the request for dematerialization in his

system DPM (SHR) and the same will be forwarded to the DM, if the request is found in

order.

The DM will electronically authorise the creation of appropriate credit balances in the

client's account.

The DPM will credit the client's account automatically.

The DP must inform the client of the changes in the client's account following the

confirmation of the request.

The issuer/ R&T may reject dematerialization request in some cases. The issuer or its

R&T Agent will send an objection memo to the DP, with or without DRF and security

certificates depending upon the reason for rejection. The DP/Investor has to remove

reasons for objection within 15 days of receiving the objection memo. If the DP fails to

remove the objections within 15 days, the issuer or its R&T Agent may reject the request

and return DRF and accompanying certificates to the DP. The DP, if the client so

requires, may generate a new dematerialization request and send the securities again to

the issuer or its R&T Agent. No fresh request can be generated for the same securities

until the issuer or its R&T Agent has rejected the earlier request and informed NSDL and

the DP about it.

RISKS

Many long-term financial advisers liken trading securities for the average investor to gambling.

The investor may be lucky once or twice, but more than likely does not have the resources or

time to follow the international market and how it affects domestic securities for well-timed

trades. Ultimately, the possibility of high returns is slapped with the reality of extremely fast

losses. Additionally, the constant buying and selling, even for successful investors, may have a

good portion of profits eaten up by capital gains taxes.

Any investment in stocks or bonds comes with the following types of risks. 

Market Risk

Industry Risk

Regulatory Risk

Business Risk

MARKET RISK

The market risk defines the overall risk involved in the capital market investments. The stock

market rises and falls depending on a number of issues. The collective view of the investors to

invest in a particular stock or bond plays a significant role in the stock market rise and fall. Even

if the company is going through a bad phase, the stock price may go up due to a rising stock

market. While conversely, the stock price may fall because the market is not steady even if the

investor's company is doing well. Hence, these are the market risks that the stocks investors

generally face.

INDUSTRY RISK

The industry risk affects all the companies of a certain industry. Hence the stocks within an

industry fall under the industry risk. Industry risk refers to the dangers to a particular stock that

stem not from problems with the company but rather from far more wide ranging issues

involving the entire industry that the company belongs to.

REGULATORY RISK

The regulatory risk may affect the investors if the investor's company comes under the obligation

of government implemented new regulations and laws.

BUSINESS RISK

The business risk may affect the investors if the company goes through some convulsion

depending on management, strategies, market share and labor force.

Types of Analysis: Fundamental and Technical.

FUNDAMENTAL ANALYSIS

Fundamental analysis calculates future price movements by looking at a business’s economic

factors, known as fundamentals. It includes economic analysis, industry analysis and company

analysis. This type of investing assumes that the short-term market is wrong, but that stock price

will correct itself in the long run. Profits can be made by purchasing a mispriced security and

then waiting for the market to recognize its mistake. It is used by buy and hold investors and

value investors, among others.

Fundamental analysis looks at financial statements, including balance sheets, cash flow

statements and income statements, to determine a company’s intrinsic value. If the price of stock

falls below this intrinsic value, its purchase is considered a good investment. The most common

model for valuing stock is the discounted cash flow model, which uses dividends received by the

investor, along with the eventual sales price, the earnings of the company or the company’s cash

flows. It also considers the current amount of debt using the debt to equity ratio.

TOOLS USED IN FUNDAMENTAL ANALYSIS

Earnings per Share – EPS

Price to Earnings Ratio – P/E

Price to Sales – P/S

Price to Book – P/B

Dividend Payout Ratio

Dividend Yield

Book Value

Return on Equity

1) Earnings Per Share (EPS) –

EPS = Net Earnings / Outstanding Shares 

The portion of a company's profit allocated to each outstanding share of common stock. Earnings

per share serve as an indicator of a company's profitability.

2) Price to earnings ratio (P/E) –

P/E Ratio = Market Price of Share / Earnings per Share

A measure of determining the value of a share. May also be used to measure the rate of return

expected by investors.

3) Price to Sales (P/S) –

P/S = Market cap / Revenues

Or

P / S = Stock price / Sales price per share

Much like P/E, the P/S number reflects the value placed on sales by the market. The lower the

P/S, the better the value, at least that’s the conventional wisdom.

4) Price to Book (P/B) –

P/B = Share price / Book value per share

Like the P/E, the lower the P/B, the better the value. Value investors would use a low P/B is

stock screens

5) Dividend Payout Ratio (DPR) –

DPR= Dividend per share / EPS

The DPR (it usually doesn’t even warrant a capitalized abbreviation) measures what a

company’s pays out to investors in the form of dividends.

6) Dividend Yield –

Dividend yield = Annual dividend per share / stock’s price per share

This measurement tells you what percentage return a company pays out to shareholders in the

form of dividends. Older, well-established companies tend to payout a higher percentage then do

younger companies and their dividend history can be more consistent.

7) Book Value –

Book Value = Assets – Liabilities

A company that is a viable growing business will always be worth more than its book value for

its ability to generate earnings and growth.

Book value appeals more to value investors who look at the relationship to the stock's price by

using the Price to Book ratio.

To compare companies, you should convert to book value per share, which is simply the book

value divided by outstanding shares.

8) Return on Equity –

Return on Equity (ROE) is one measure of how efficiently a company uses its assets to produce

earnings.

ROE = Net Income / Shareholder’s Equity

The amount of net income returned as a percentage of shareholders equity. Return on equity

measures a corporation's profitability by revealing how much profit a company generates with

the money shareholders have invested. 

TECHNICAL ANALYSIS

Technical Analysis: Introduction

Technical analysis takes a completely different approach; it doesn't care one bit about the "value"

of a company or a commodity. Technicians (sometimes called chartists) are only interested in the

price movements in the market.

Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and

demand in a market in an attempt to determine what direction, or trend, will continue in the future.

In other words, technical analysis attempts to understand the emotions in the market by studying

the market itself, as opposed to its components. If you understand the benefits and limitations of

technical analysis, it can give you a new set of tools or skills that will enable you to be a better

trader or investor.

Technical Analysis: The Basic Assumptions

What Is Technical Analysis?

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, 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. In any case, technical analysts' exclusive

use of historical price and volume data is what separates them from their fundamental

counterparts. 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.

The field of technical analysis is based on three assumptions:

1. The market discounts everything.

2. Price moves in trends.

3. History tends to repeat itself.

1. The Market Discounts Everything

A major criticism of technical analysis is that it only considers price movement, ignoring the

fundamental factors of 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. Technical analysts believe that the company's fundamentals, along with

broader economic factors and market psychology, are all priced into the stock, removing the need to

actually consider these factors separately. This only leaves the analysis of price movement,

which technical theory views as a product of the supply and demand for a particular stock in the

market.

2. Price Moves in Trends

In technical analysis, price movements are believed to follow trends. This means that after a

trend has been established, the future price movement is more likely to be in the same direction

as the trend than to be against it. Most technical trading strategies are based on this assumption.

3. History Tends To Repeat Itself

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms

of price movement. The repetitive nature of price movements is attributed to market psychology;

in other words, market participants tend to provide a consistent reaction to similar market stimuli

over time. Technical analysis uses chart patterns to analyze market movements and understand

trends. Although many of these charts have been used for more than 100 years, they are still

believed to be relevant because they illustrate patterns in price movements that often repeat

themselves.

Not Just for Stocks

Technical analysis can be used on any security with historical trading data. This includes stocks,

futures and commodities, fixed-income securities, forex, etc. In this tutorial, we'll usually analyze

stocks in our examples, but keep in mind that these concepts can be applied to any type of

security. In fact, technical analysis is more frequently associated with commodities and forex,

where the participants are predominantly traders.

Technical Analysis: Technical vs. Fundamental 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. Let's get into the details of how these two

approaches differ, the criticisms against technical analysis and how technical and fundamental

analysis can be used together to analyze securities.

The Differences

Charts vs. Financial Statements

At the most basic level, a technical analyst approaches a security from the charts, while a

fundamental analyst starts with the financial statements. (For further reading, see Introduction To

Fundamental Analysis and Advanced Financial Statement Analysis.)

By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries

to determine a company's value. In financial terms, an analyst attempts to measure a company's

intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a

stock trades below its intrinsic value, it's a good investment. Although this is an

oversimplification (fundamental analysis goes beyond just the financial statements) for the

purposes of this tutorial, this simple tenet holds true.

Technical traders, on the other hand, believe there is no reason to analyze a company's

fundamentals because these are all accounted for in the stock's price. Technicians believe that all

the information they need about a stock can be found in its charts.

Time Horizon

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 different timeframes that these two approaches use is a result of the nature of the investing

style to which they each adhere. 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 realized until

the stock's market price rises to its "correct" value. This type of investing is called value investing

and assumes that the short -term market is wrong, but that 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 analyzes are only released over long periods of

time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a

daily basis like price and volume information. Also remember that fundamentals are the actual

characteristics of a business. New management can't implement sweeping changes overnight and

it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason

that fundamental analysts use a long-term timeframe, therefore, is because the data they use to

analyze a stock is generated much more slowly than the price and volume data used by technical

analysts.

Trading Versus Investing

Not only is technical analysis more short term in nature that fundamental analysis, but the goals

of a purchase (or sale) of a stock are usually different for each approach. In general, technical

analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors

buy assets they believe can increase in value, 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 be blurry,

but it does characterize a difference between the two schools.

The Critics

Some critics see technical analysis as a form of black magic. Don't be surprised to see them

question the validity of the discipline to the point where they mock its supporters. In fact,

technical analysis has only recently begun to enjoy some mainstream credibility. While most

analysts on Wall Street 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 correct one

- any past trading information is already reflected in the price of the stock and, therefore, any

analysis to find undervalued securities is useless.

There are three versions of EMH. In the first, called weak form efficiency, all past price information

is already included in the current price. According to weak form efficiency, technical analysis

can't predict future movements because all past information has already been accounted for and,

therefore, analyzing the stock's past price movements will provide no insight into its future

movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be

of little use in finding investment opportunities. The third is strong form efficiency, which states

that all information in the market is accounted for in a stock's price and neither technical nor

fundamental analysis can provide investors with an edge. The vast majority of academics believe

in at least the weak version of EMH, therefore, from their point of view, if technical analysis

works, market efficiency will be called into question. (For more insight, read What Is Market

Efficiency? and Working Through The Efficient Market Hypothesis.)

There is no right answer as to who is correct. There are arguments to be made on both sides and,

therefore, it's up to you to do the homework and determine your own philosophy.

Can They Co-Exist?

Although technical analysis and fundamental analysis are seen by many as polar opposites - the

oil and water of investing - many market participants have experienced great success by

combining the two. For example, some fundamental analysts use technical analysis techniques to

figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs

when the security is severely oversold. By timing entry into a security, the gains on the

investment can be greatly improved

Alternatively, some technical traders might look at fundamentals 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 reaffirm his or her decision by looking at some key fundamental data.

Oftentimes, having both the fundamentals and technicals on your side can provide the best-case

scenario for a trade.

While mixing some of the components of technical and fundamental analysis is not well received

by the most devoted groups in each school, there are certainly benefits to at least understanding

both schools of thought.

.

1.3 MAJOR FACTORS THAT AFFECT STOCK PRICE IN STOCK MARKET

GLOBALLY

When you wish to invest in the stock market, then you should always make a good

survey of the whole market. As you know that you cannot predict the stock market, so in

that case you need to know the functioning of the market. There are some major factors

that affect stock price. So let us discuss about the different factors affecting the stock

price in this article.

Demand and supply

One of the major factors affecting stock price is demand and supply. The trend of the

stock market trading directly affects the price. When people are buying more stocks, then

the price of that particular stock increases. On the other hand if people are selling more

stocks, then the price of that stock falls. So, you should be very careful when you decide

to invest in the Indian stock market.

Market Cap

Never try to guess the worth of a company simply by comparing the price of the stock.

You should always keep in mind that it is not the stock but the market capitalization of

the company that determines the worth of the company. So market cap is another factor

that affects stock price.

Lower interest rates

Lower interest rates can make shares more attractive for two reasons. Lower interest rates

help boost economic growth making firms more profitable. Also lower interest rates

make shares relatively more attractive than saving money in a bank or holding bonds. If

bond yields fall, it may encourage investors to switch into shares which give a relatively

better dividend.

Stability

Stock markets dislike shocks that could threaten economic stability and future growth.

Therefore, they will tend to fall on news of terrorist attacks or spikes in the price of oil.

They will also dislike political instability which may make it difficult to pursue strong

economic policies.

Earning/Price Ratio

Another important factor affecting stock price is the earning/price ratio. This gives you a

fair idea of a company’s share price when it is compared to its earnings. The stock

becomes undervalued if the price of the share is much lower than the earnings of a

company.  But if this is the case, then it has the potential to rise in the near future. The

stock becomes overvalued if the price is much higher than the actual earning.

Economic growth

Higher economic growth or better prospects for growth will help firms be more

profitable because there will be more demand for goods and services. This will help boost

company dividends and therefore share prices.

Confidence and expectations

A key factor is the mood of investors. If they receive economic news that gives optimism

then they are more likely to buy shares. If they receive bad news they will sell. This is

why in the depth of a recession, stock markets can start to rise. Investors are always

trying to predict the future. Therefore if they feel the worst is over the stock market can

rally – even when economic fundamentals remain poor.

Bandwagon effect

At times the stock market seems to over-react to certain events. For example, in 1987,

relatively little bad news caused the stock market to fall 25%. Even today it remains a

little mystery why the stock market fell so much – there was no economic problem. In

fact the stock market soon recovered it’s lost ground. Part of the issue is that people

follow the mood. When prices fall, people may feel the need to follow suit and get out of

the market.

Related markets

Often investors have choices. For example, rather than investing in stock market, they

could buy government bonds or commodities. If investors feel government bonds are

overpriced and likely to fall, then the stock market can benefit as people move into

shares.

1.4 OBJECTIVES OF STUDY:

To determine the best stocks amongst the NIFTY 50 stocks for investment

To determine whether to sell, buy or retain a particular NIFTY 50 stock

To know the different indicators and chart patterns used in Technical Analysis

To understand about the Securities market in India

To analyze the role of Equities in Indian financial system

1.5 SCOPE OF THE STUDY:

The study is limited to “Equities” with special reference to stocks in the NIFTY 50 index. The

other stocks listed in the NSE, BSE or any other international stock exchange are not considered.

The study is purely based on the Technical Analysis of the selected stocks. The Fundamental

analysis of the stocks is not considered. In the Technical Analysis though may Indicators and

chart patterns exist, only few of the indicators and chart patterns are considered. These are

selected because; they are considered to be widely used indicators and patterns of study of

equities as a part of technical analysis.

Many other factors which usually impact the stocks like the economic conditions, the impact of

currency and the international markets are not considered here. This is due to lack of time.

1.6 METHODOLOGY

Inorder to do the technical analysis of the NIFTY 50 stocks, the secondary data was considered.

The data of the stocks for the past one year was taken. Various books and articles from the web

have been referred to gain an insight into Technical Analysis.

To study the performance of the stocks using Technical Indicators and chart patterns, the

websites like Moneycontrol.com and Nseindia.com were used. Also, NSE India, NSE guide

websites provided extensive information , for understanding the Equity Market in India .

LITERATURE REVIEW

Fernando Fernandez –Rodriguez, Simon Sosvilla –Rivero, Julian Andrada –Felix (1999)

assessed whether some simple forms of technical analysis can predict stock price movement in

the Madrid stock exchange, covering thirty-one-year period from Jan 1966 –Oct 1997.the results

provide strong support for profitability of those technical trading rules. By making use of

bootstrap techniques the author shows the returns obtained from these trading rules are not

consistent with several null models frequently used in finance.

C. L. Osler (2001) provides a microstructural explanation for the success of two familiar

predictions from technical analysis: (1) trends tend to be reversed at predictable support and

resistance levels, and (2) trends gain momentum once predictable support and resistance levels

are crossed. The explanation is based on a close examination of stop-loss and take-profit orders

at a large foreign exchange dealing bank. Take-profit orders tend to reflect price trends and stop-

loss Technical Analysis on Selected Stocks of Energy Sector orders tend to intensify trends. The

requested execution rates of these orders are strongly clustered at round numbers, which are

often used as support and resistance levels. Significantly, there are marked differences between

the clustering patterns of stop-loss and take-profit orders, and between the patterns of stop-loss

buy and stop-loss sell orders. These differences explain the success of the two predictions.

Gupta, (2003) examined the perceptions about the main sources of his worries concerning the

stock market. A sample comprise of middle-class household’s spread over 21 sates/union

territories. The study reveals that the foremost cause of worry for household investors is

fraudulent company management and in the second place is too much volatility and in the third

place is too much price manipulation.

Ravindra and Wang (2006) examine the relationship of trading volume to stock indices in Asian

markets. Stock market indices from six developing markets in Asia are analyzed over the 34

month period ending in October 2005. In the South Korean market, the causality extends from

the stock indices to trading volume while the causality is the opposite in the Taiwanese market.

Eugene F.Fama (1965) has answered the questions to what extend can the past history of a

common stock price can be used to make meaningful predictions concerning the future prices of

the stock? The theory of random walk on stock prices is studied with two hypotheses. They are i)

Successive price changes are independent and ii) The price changes conform to some probability

distribution. The data for this study consists of daily prices for each of the thirty stocks of the

Dow –Jones industrial average. This study concludes that there is strong and voluminous

evidence in favor of random walk theory.

Cooter (1962) found that the stock prices move at random when studied at one week interval.

The data for his study was week-end prices of forty five stocks from New York stock exchange.

He tested randomness of share by means of a mean square successive difference test. He

concluded that there was not one random walk model. He concluded that the share price trends

could be predicted when studied at fourteen-week interval. But in total the stock prices followed

a random walk at weekly intervals.

METHODOLOGY

The data pertaining to the all the 50 of the S&P CNX NIFTY has been collected

The data of the stocks has been collected for the period of one year. It is from

1st February , 2012 till 30th January, 2013

For the sake Analysis, six different tools were considered. They are the chart patterns and

indicators like Simple Moving Average, Moving Average Crossover, Relative Strength

Index, Moving Averege Convergence & Divergence, Volume.

The bullish or bearish nature of the stock is analyzed by considering the results given by

each indicator considered for every stock.

The final decision regarding each stock has been made when majority of the indicators

gave a similar result i.e.

The data has been collected through certain secondary sources like Nseindia.com,

Moneycontrol.com, stockezy.com etc. Some other books and documents were also

referred to collect the data.

Assumptions

The evaluation of stocks only technical analysis is done. No other fundamental analysis

or any other external factors have been considered.

For the purpose of analysis only certain indicators of technical analysis have been used.

DATA PRESENTATION AND ANALYSIS

HOW TO USE TECHNICAL ANALYSIS

1) Identify the trend of the market

2) Measure the strength of the trend

3) Look for the low risk entry into that trend

4) Use Money Management to determine the size of any position

5) Use an appropriate stop loss

6) Keep following trend till market proves it has reversed

7) Keep out of the market when the market is not showing significant trend one way or the

other

DOW THEORY

The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical

analysis today. Charles Dow created the Industrial Average, of top blue chip stocks, and a second

average of top railroad stocks (now the Transport Average). He believed that the behavior of the

averages reflected the hopes and fears of the entire market. The behavior patterns that he

observed apply to markets throughout the world.

Markets fluctuate in more than one time frame at the same time

The first is the daily variation due to local causes and the balance of buying and

selling at that particular time (Ripple).

The secondary movement covers a period ranging from days to weeks, averaging

probably between six to eight weeks (Wave).

The third move is the great swing covering anything from months to years, averaging

between 6 to 48 months. (Tide).

Bull markets are broad upward movements of the market that may last several years,

interrupted by secondary reactions. Bear markets are long declines interrupted by

secondary rallies. These movements are referred to as the primary trend.

Primary Phases of Movements

Secondary movements normally retrace from one-third to two thirds of the primary trend since

the previous secondary movement.

Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad

market movements.

Primary Movements have Three Phases

1. Bull markets

o Bull markets commence with reviving confidence as business conditions improve.

o Prices rise as the market responds to improved earnings Rampant speculation dominates

the market and price advances are based on hopes and expectations rather than actual

result.

2. Bear markets

o Bear markets start with abandonment of the hopes and expectations that sustained

inflated prices.

o Prices decline in response to disappointing earnings.

o Distress selling follows as speculators attempt to close out their positions and securities

are sold without regard to their true value.

3. Ranging Markets

o A secondary reaction may take the form of a ‘line’, which may endure for several weeks.

o Price fluctuates within a narrow range of about five percent.

o Breakouts from a range can occur in either direction.

o Advances above the upper limit of the line signal accumulation and higher prices;

o Declines below the lower limit indicate distribution and lower prices;

o Volume is used to confirm price breakouts.

Bull Trends

A bull trend is identified by a series of rallies where each rally exceeds the highest point of the

previous rally. The decline, between rallies, ends above the lowest point of the previous decline.

Successive higher highs and higher lows

The start of an uptrend is signaled when price makes a higher low (trough), followed by a rally

above the previous high (peak):

Start = higher Low + break above previous High.

The end is signaled by a lower high (peak), followed by a decline below the previous low

(trough):

End = lower High + break below previous Low.

Bear Trends: A bear trend starts at the end of a bull trend: when a rally ends with a lower peak

and then retreats below the previous low. The end of a bear trend is identical to the start of a bull

trend. Each successive rally fails to penetrate the high point of the previous rally. Each decline

terminates at a lower point than the preceding decline.

Successive lower highs and lower lows

Large Corrections: A large correction occurs when price falls below the previous low (during a

bull trend) or where price rises above the previous high (in a bear trend).

A bull trend starts when price rallies above the previous high,

A bull trend ends when price declines below the previous low,

A bear trend starts at the end of a bull trend (and vice versa).

CHART PATTERN

1 Candlestick charting: Candlestick charts have been around for hundreds of years. They are

often referred to as “Japanese candles” because the Japanese would use them to analyze the price

of rice contracts.

Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low.

The difference is the use of color to show if the stock went up or down over the day.

The chart below is an example of a candlestick chart for AT&T (T). Green bars indicate the

stock price rose, red indicates a decline:

Figure: Candlestick charting

Investors seem to have a "love/hate" relationship with candlestick charts. People either love them

and use them frequently or they are completely turned off by them. There are several patterns to

look for with candlestick charts - here are a few of the popular ones and what they mean.

. This is a bullish pattern - the stock opened at (or near) its low and closed near its high

The opposite of the pattern above, this is a bearish pattern. It indicates that the stock

opened at (or near) its high and dropped substantially to close near its low.

Known as "the hammer", this is a bullish pattern only if it occurs after the stock price

has dropped for several days. A small body along with a large range identifies a hammer. This

pattern indicates that a reversal in the downtrend is in the works.

2 Line Chart: The most basic of the four charts is the line chart because it represents only the

closing prices over a set period of time. The line is formed by connecting the closing prices over

the time frame. Line charts do not provide visual information of the trading range for the

individual points such as the high, low and opening prices. However, the closing price is often

considered to be the most important price in stock data compared to the high and low for the day

and this is why it is the only value used in line charts.

Figure: Line Chart

3 Support and resistance: Support and resistance are price levels at which movement should

stop and reverse direction. Think of support/resistance (S/R) as levels that act as a floor or a

ceiling to future price movements.

Support - A price level below the current market price, at which buying interest should be able

to overcome selling pressure and thus keep the price from going any lower.

Resistance - A price level above the current market price, at which selling pressure should be

strong enough to overcome buying pressure and thus keep the price from going any higher. One

of two things can happen when a stock price approaches a support/resistance level. On the one

hand, it can act as a reversal point: in other words, when a stock price drops to a support level, it

Known as a "star”. For the most part, stars typically indicate a reversal and or

indecision. There is a possibility that after seeing a star there will be a

reversal or change in the current trend.

will go back up. On the other hand, S/R levels may reverse roles once they are penetrated.

For example - When the market price falls below a support level, that former support level will

then become a resistance level when the market later trades back up to that level.

Figure: Support and resistance

This chart shows an excellent example of support and resistance levels for General Electric (GE).

Notice that once the stock price penetrated below the support level in December, it became the

resistance level. You also need to understand that S/R levels vary in strength, leading to certain

price levels being designated as major or minor S/R levels. For example -- A five-year high on a

bar chart would be a much more significant and useful resistance level than a one-month

resistance level.

4 Cup and Handle: This is a pattern on a bar chart that can be as short as seven weeks and as

long as 65 weeks. The cup is in the shape of a "U". The handle has a slight downward drift. The

right-hand side of the pattern has low trading volume. As the stock comes up to test the old

highs, the stock will incur selling pressure by the people who bought at or near the old high. This

selling pressure will make the stock price trade sideways with a tendency towards a downtrend

for anywhere from four days to four weeks, then it will take off.

This pattern looks like a pot with a handle. It is one of the easier patterns to detect; and investors

have made a lot of money using it.

Figure: Cup and Handle

5 Head and Shoulders: This is a chart formation resembling an "M" in which a stock's price:

o Rises to a peak and then declines, then

o Rises above the former peak and again declines, and then

o Rises again but not to the second peak and again declines.

The first and third peaks are shoulders, and the second peak forms the head. This pattern is

considered a very bearish indicator.

Figure: Head and Shoulders

6 Double Bottom: This pattern resembles a "W" and occurs when a stock price drops to a

similar price level twice within a few weeks or months. You should buy when the price passes

the highest point in the handle. In a perfect double bottom, the second decline should normally

go slightly lower than the first decline to create a shakeout of jittery investors. The middle point

of the "W" should not go into new high ground. This is a very bullish indicator.

Figure: Double Bottoms

The belief is that, after two drops in the stock price, the jittery investors will be out and the long-

term investors will still be holding on.

7 Double Tops: Double tops point out a weakness of the uptrend and warn for a change of trend

generally a selling crazy starts when this formation is indicates.

Figure: Double Tops

8 Falling wedges: Falling wedges are opposite of the rising wedges and pull back reactions

during the up trends. Sellers continue to believe the securities in their hand do not want to sell so,

volume decreases significantly. When the upper line is broken, generally a rally starts. So this

formation is a chance to buy security available prices in an uptrend.

Figure: Falling wedges

9 Symmetrical Triangles: All triangles formations are consolidation formations. In symmetrical

triangle direction of the trend is not known. It is only can be identified after one of the line

broken. Prices go up if upper line broken. And go down if lower line broken. Volume is very

important for triangle formations. Volume should decrease during the formations.

Figure: Symmetrical Triangles

10 Descending triangles: It is a signal for down trend. Price target can be found approximately

by drawing a parallel line to descending line.

Figure: Descending triangles

11 Ascending Triangles: It is a signal for uptrend. By drawing a parallel line to descending line,

price target can be calculated approximately.

Figure: Ascending triangle

INDICATORS OF THE STUDY

Exponential Moving Average (EMA)

Are calculated by applying a percentage of today’s closing price to yesterday’s moving average

value. Use an exponential moving average to place more weight on recent prices.

This moving average calculation uses a smoothing factor to place a higher weight on recent data

points and is regarded as much more efficient than the linear weighted average. Having an

understanding of the calculation is not generally required for most traders because most charting

packages do the calculation for you.

The most important thing to remember about the exponential moving average is that it is more

responsive to new information relative to the simple moving average.

This responsiveness is one of the key factors of why this is the moving average of choice among

many technical traders. As you can see in Figure 2, a 15-period EMA raises and falls faster than

a 15-period SMA. This slight difference doesn’t seem like much, but it is an important factor to

be aware of since it can affect returns.

Figure: Exponential Moving Averages (EMA)

Moving Average Convergence Divergence (MACD)

Common, the “MACD” is a trend following, momentum indicator that shows the relationship

between two moving averages of prices. To Calculate the MACD subtract the 26-day EMA

from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on

top of the MACD. There are 3 common methods to interpret the MACD:

Crossover – When the MACD falls below the signal line it is a signal to sell. Vice versa when

the MACD rises above the signal line.

Divergence – When the security diverges from the MACD it signals the end of the current trend.

Overbought/Oversold – When the MACD rises dramatically (shorter moving average pulling

away from longer term moving average) it is a signal the security is overbought and will soon

return to normal levels.

Other less common moving averages include triangular, variable, and weighted moving average.

All of them being slight deviations from the++ ones above and are used to detect different

characteristics such as volatility, and weighting different time spans.

One of the easiest indicators to understand, the moving average, shows the average value of a

security’s price over a period of time. To find the 50-day moving average, you would add up the

closing prices (but not always – explain later) from the past 50 days and divide them by 50.

Because prices are constantly changing, the moving average will move as well. It should also be

noted that moving averages are most as well. It should also be noted that moving averages are

most often used then compared or used in conjunction with other indicators such as moving

average convergence divergence (MACD) and exponential moving (E M A).

The most commonly used moving averages are 20, 30, 50,100 and 200 days. Each moving

average provides a different interpretation on what the stock will do-there is not one right time

frame. The longer the time spans, the less sensitive the moving average will be to daily price

changes. Moving averages are used to emphasize the direction of a trend and smooth out price

and volume fluctuations that can confuse interpretation. Here is a visual example using stock

price

Figure: Moving Average Convergence Divergences (MACD)

Notice that back, in September the stock price dropped well below its 50-day average (the green

line) there has been a steady downward trend since then and no really strong divergence until the

end of December when it rose above its 50-days average and continued to rise for several weeks.

Typically, when a stock price moves below its moving average it is a bad sign because the stock

is moving on a negative trend. The opposite is true for stock that exceed their moving average-in

this case, hold on for the ride.

BOLLINGER BANDS WIDTH

Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare

volatility and relative price levels over a period time. The indicator consists of three bands

designed to encompass the majority of a security's price action. The purpose of Bollinger Bands

is to provide a relative definition of high and low. By definition prices are high at the upper band

and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in

comparing price action to the action of indicators to arrive at systematic trading decisions.

Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle

band is a measure of the intermediate-term trend, usually a simple moving average that serves as

the base for the upper and lower bands. The interval between the upper and lower bands and the

middle band is determined by volatility, typically the standard deviation of the same data that

were used for the average. The default parameters, 20 periods and two standard deviations, may

be adjusted to suit your purposes:

Middle Bollinger Band = 20-period simple moving average

Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard deviation

Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard deviation

Standard deviation is a statistical unit of measure that provides a good assessment of a price

plot's volatility. Using the standard deviation ensures that the bands will react quickly to price

movements and reflect periods of high and low volatility. Sharp price increases (or decreases),

and hence volatility, will lead to a widening of the bands.

Figure: Bollinger Bands Width

The center band is the 20-day simple moving average. The upper band is the 20-day simple

moving average plus 2 standard deviations. The lower band is the 20-day simple moving average

less 2 standard deviations.

On-Balance Volume

The on-balance volume (OBV) indicator is well-known technical indicators that reflect

movements in volume. It is also one of the simplest volume indicators to compute and

understand. Joe Granville introduced the On Balance Volume (OBV) indicator in his 1963 book,

Granville's New Key to Stock Market Profits. This was one of the first and most popular

indicators to measure positive and negative volume flow. The concept behind the indicator:

volume precedes price. OBV is a simple indicator that adds a period's volume when the close is

up and subtracts the period's volume when the close is down. A cumulative total of the volume

additions and subtractions form the OBV line. This line can then be compared with the price

chart of the underlying security to look for divergences or confirmation.

Calculation

As stated above, OBV is calculated by adding the day's volume to a running cumulative total

when the security's price closes up, and subtracts the volume when it closes down.

For example, if today the closing price is greater than yesterday's closing price, then the new

OBV = Yesterday's OBV + Today's Volume

If today the closing price is less than yesterday's closing price, then the new

OBV = Yesterday's OBV - Today's Volume

If today the closing price is equal to yesterday's closing price, then the new

OBV = Yesterday's OBV

Use

The idea behind the OBV indicator is that changes in the OBV will precede price changes. A

rising volume can indicate the presence of smart money flowing into a security. Then once the

public follows suit, the security's price will likewise rise.

Like other indicators, the OBV indicator will take a direction. A rising (bullish) OBV line

indicates that the volume is heavier on up days. If the price is likewise rising, then the OBV can

serve as a confirmation of the price uptrend. In such a case, the rising price is the result of an

increased demand for the security, which is a requirement of a healthy uptrend.

However, if prices are moving higher while the volume line is dropping, a negative divergence is

present. This divergence suggests that the uptrend is not healthy and should be taken as a

warning signal that the trend will not persist.

The numerical value of OBV is not important, but rather the direction of the line. A user should

concentrate on the OBV trend and its relationship with the security's price.

Figure: On-Balance Volumes

This chart shows how the OBV line can be used as confirmation of a price trend. The peak in

September was followed by lower price movements that corresponded with volume spikes, thus

implying that the downtrend was going to continue.

Aroon Oscillators

The Aroon indicator is a relatively new technical indicator that was created in 1995. The Aroon

is a trending indicator used to measure whether a security is in an uptrend or downtrend and the

magnitude of that trend. The indicator is also used to predict when a new trend is beginning.

The indicator is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon down" line

(red dotted line). The Aroon up line measures the amount of time it has been since the highest

price during the time period. The Aroon down line, on the other hand, measures the amount of

time since the lowest price during the time period. The number of periods that are used in the

calculation is dependent on the time frame that the user wants to analyze.

Figure: Aroon Up And Down Oscillator

An expansion of the Aroon is the Aroon oscillator, which simply plots the difference between the

Aroon up and down lines by subtracting the two lines. This line is then plotted between a range

of -100 and 100. The centerline at zero in the oscillator is considered to be a major signal line

determining the trend. The higher the value of the oscillator from the centerline point, the more

upward strength there is in the security; the lower the oscillator's value is from the centerline, the

more downward pressure. A trend reversal is signaled when the oscillator crosses through the

centerline. For example, when the oscillator goes from positive to negative, a downward trend is

confirmed. Divergence is also used in the oscillator to predict trend reversals. A reversal warning

is formed when the oscillator and the price trend are moving in an opposite direction.

The Aroon lines and Aroon oscillators are fairly simple concepts to understand but yield

powerful information about trends. This is another great indicator to add to any technical trader's

arsenal.

Money Flow Index

The Money Flow Index (MFI) is a momentum indicator that is similar to the Relative Strength

Index (RSI) in both interpretation and calculation. However, MFI is a more rigid indicator in that

it is volume-weighted, and is therefore a good measure of the strength of money flowing in and

out of a security. It compares "positive money flow" to "negative money flow" to create an

indicator that can be compared to price in order to identify the strength or weakness of a trend.

Like the RSI, the MFI is measured on a 0 - 100 scale and is often calculated using a 14 day

period.

The "flow" of money is the product of price and volume and shows the demand for a security

and a certain price. The money flow is not the same as the Money Flow Index but rather is a

component of calculating it. So when calculating the money flow, we first need to find the

average price for a period. Since we are often looking at a 14-day period, we will calculate the

typical price for a day and use that to create a 14-day average.

Typical Price = (Day high + Day low + Day close) / 3

Money Flow = (Typical Price) X Volume

The MFI compares the ratio of "positive" money flow and "negative" money flow. If typical

price today is greater than yesterday, it is considered positive money. For a 14-day average, the

sum of all positive money for those 14 days is the positive money flow. The MFI is based on the

ratio of positive/negative money flow (Money Ratio).

Money Ratio = positive money flow / Negative money flow

Finally, the MFI can be calculated using this ratio:

Money Flow Index- 100-(100 / (1 + money ratio))

The fewer number of days used to calculate the MFI, the more volatile it will be.

The MFI can be interpreted much like the RSI in that it can signal divergences and

overbought/oversold conditions.

Positive and negative divergences between the stock and the MFI can be used as buy and sell

signals respectively, for they often indicate the imminent reversal of a trend. If the stock price is

falling, but positive money flow tends to be greater than negative money flow, then there is more

volume associated with daily price rises than with the price drops. This suggests a weak

downtrend that threatens to reverse as money flowing into the security is "stronger" than money

flowing out of it.

As with the RSI, the MFI can be used to determine if there is too much or too little volume

associated with a security. A stock is considered "overbought" if the MFI indicator reaches 80

and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and

below suggests a stock is "oversold".

Figure: Money Flow Index

Rate of change indicators (ROC)

It is a very popular oscillator which measures the rate of change of the current price as compared

to the price a certain number of days or weeks back. The ROC has to be used along with price

chart. The buying and selling signals indicated by the ROC should also be confirmed by the price

chart.

Figure: Rate of change

Relative strength index (RSI)

There are a few different tools that can be used to interpret the strength of a stock. One of these

is the Relative Strength Index (RSI), which is a comparison between the days that a stock

finishes up and the days it finishes down. This indicator is a big tool in momentum trading.

The RSI is a reasonably simple model that anyone can use. It is calculated using the following

formula.

RSI = 100 - [100/(1 + RS)]

RS = (Avg. of n-day up closes)/(Avg. of n-day down closes)

n = days (most analysts use 9 - 15 day RSI)

The RSI ranges from 0 to 100. At around the 70 levels, a stock is considered overbought and you

should consider selling. In a bull market some believe that 80 is a better level to indicate an

overbought stock since stocks often trade at higher valuations during bull markets. Likewise, if

the RSI approaches 30, a stock is considered oversold and you should consider buying. Again,

make the adjustment to 20 in a bear market.

The smaller the number of days used, the more volatile the RSI is and the more often it will hit

extremes. A longer term RSI is more rolling, fluctuating a lot less. Different sectors and

industries have varying threshold levels when it comes to the RSI. Stocks in some industries will

go as high as 75-80 before dropping back, while others have a tough time breaking past 70. A

good rule is to watch the RSI over the long term (one year or more) to determine at what level

the historical RSI has traded and how the stock reacted when it reached those levels.

The RSI is a great indicator that can help you make some serious money. Be aware that big

surges and drops in stocks will dramatically affect the RSI, resulting in false buy or sell signals.

Most investors agree that the RSI is most effective in "backing up" or increasing confidence

before making an investment decision - don't invest simply based on the RSI numbers.

Figure: Relative Strength Index (RSI)

Above, we have an RSI chart for AT&T. The RSI is the green line, and its scale is the numbers

on the right hand side that go from 0 to 100. Notice the RSI was approaching the 60-70 level in

December and January, and then the stock (blue line) sold off. Also, notice that when the RSI

dropped to 25 around October the stock climbed up nearly 30% in just a couple of weeks.

Using the moving averages, trend lines divergence, support and resistance lines along with the

RSI chart can be very useful. Rising bottoms on the RSI chart can produce the same positive

trend results as they would on the stock chart. Should the general trend of the stock price tangent

from the RSI, it might spark a warning that the stock is either over- or under bought.

Momentum

The momentum is certainly the easiest one to compute. The momentum is the difference between

today's price and the one of n days before.

With: Pt today's price. Pt-n the price at the date t-n

The momentum is: MOt = Pt - Pt-nrf

TRIX (Triple exponential)

"Trix (or TRIX) is a technical analysis oscillator developed in the 1980s by Jack Huston, editor

of Technical Analysis of Stocks and Commodities magazine. It shows the slope (i.e. derivative)

of a triple-smoothed exponential moving average. The name Trix is from "triple exponential

Trix is calculated with a given N-day period as follows:

o Smooth prices (often closing prices) using an N-day exponential moving average

o Smooth a third time, using a further N-day EMA

o Calculate the percentage difference between today's and yesterday's value in that final

smoothed series

Like any moving average, the triple EMA is just a smoothing of price data and therefore is trend-

following. A rising or falling line is an uptrend or downtrend and Trix shows the slope of that

line, so it's positive for a steady uptrend, negative for a downtrend, and a crossing through zero is

a trend-change, i.e. a peak or trough in the underlying average.

The triple-smoothed EMA is very different from a plain EMA. In a plain EMA the latest few

days dominate and the EMA follows recent prices quite closely; however, applying it three times

results in weightings spread much more broadly, and the weights for the latest few days are in

fact smaller than those of day’s further past. The following graph shows the weightings for an

N=10 triple EMA (most recent days at the left).

Graph shows the weightings for an N=10 triple EMA (most recent days at the left).

Figure: TRIX (Triple exponential)

Triple exponential moving average weightings, N=10 (percentage versus days ago)

Note that the distribution's mode will lie with pN-2's weight, i.e. in the graph above p8 carries the

highest weighting. An N of 1 is invalid.

The easiest way to calculate the triple EMA based on successive values is just to apply the EMA

three times, creating single-, then double-, then triple-smoothed series. The triple EMA can also

be expressed directly in terms of the prices as below, with p0 today's close, p1 yesterday's, etc,

and with (as for a plain EMA).

The coefficients are the triangle numbers, n (n+1)/2. In theory, the sum is infinite, using all past

data, but as f is less than 1 the powers fn become smaller as the series progresses, and they

decrease faster than the coefficients increase, so beyond a certain point the terms are negligible.

Williams %R

Developed by Larry Williams, Williams % R is a momentum indicator that works much like the

Stochastic Oscillator. It is especially popular for measuring overbought and oversold levels. The

scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings

from -80 to -100 considered oversold.

William %R, sometimes referred to as %R, shows the relationship of the close relative to the

high-low range over a set period of time. The nearer the close is to the top of the range, the

nearer to zero (higher) the indicator will be. The nearer the close is to the bottom of the range,

the nearer to -100 (lower) the indicator will be. If the close equals the high of the high-low range,

then the indicator will show 0 (the highest reading). If the close equals the low of the high-low

range, then the result will be -100 (the lowest reading).

Calculation

%R = [(highest high over? periods - close) / (highest high over? periods - lowest low over?

periods)] * -100

Typically, Williams % R is calculated using 14 periods and can be used on intraday, daily,

weekly or monthly data. The time frame and number of periods will likely vary according to

desired sensitivity and the characteristics of the individual security.

Use

It is important to remember that overbought does not necessarily imply time to sell and oversold

does not necessarily imply time to buy. A security can be in a downtrend, become oversold and

remain oversold as the price continues to trend lower. Once a security becomes overbought or

oversold, traders should wait for a signal that a price reversal has occurred. One method might be

to wait for Williams %R to cross above or below -50 for confirmation.

Price reversal confirmation can also be accomplished by using other indicators or aspects of

technical analysis in conjunction with Williams %R.

One method of using Williams %R might be to identify the underlying trend and then look for

trading opportunities in the direction of the trend. In an uptrend, traders may look to oversold

readings to establish long positions. In a downtrend, traders may look to overbought readings to

establish short positions.

Figure: Williams % R

The chart of Weyerhaeuser with a 14-day and 28-day Williams % R illustrates some key points:

o 14-day %R appears quite choppy and prone to false signals.

o 28-day %R smoothed the data series and the signals became less frequent and more

reliable.

o When the 28-day %R moved to overbought or oversold levels, it typically remained there

for an extended period and the stock continued its trend.

o Some good entry signals were given with the 28-day %R by waiting for a move above or

below -50 for confirmation.

EVALUATION OF TECHNICAL ANALYSIS:

Technical analysis appears to be a highly controversial approach to security analysis. It has its

ardent votaries: it has its severe critics. The advocates of technical analysis offer the following

interrelated arguments in support of their position:

Under the influence of crowed psychology, trend persists for quite some time. Tools of

technical analysis that help in identifying these trends early are helpful aids in investment

decision making.

Shift in demand and supply are gradual rather than instantaneous. Technical analysis

helps in detecting these shifts rather early and hence provides clues to future price

movement.

Fundamental information about a company is absorbed and assimilated by the market

over a period. Hence, the price movement tends to continue in more or less the same

direction until the information is assimilated in the stock price.

Charts provide what has happened in the past and hence give a sense of volatility that can

be expected from the stock. Future, the information on trading volume which is ordinarily

provide at the bottom of a bar chart gives a fair idea of the extent of the public interest in

the stock

The detractors of technical analysis believe that the technical analysis is a useless exercise. Their

arguments run as follows:

Most technical analyst are not able to offer convincing explanation for the tools

employed by them

Empirical evidence in support of the random-walk hypothesis casts its shadow over the

usefulness of technical analysis.

By the time an uptrend or down may have been signaled by technical analysis, it already

have taken place.

Ultimately, technical analysis must be a self-defeating proposition as more and more

people employ the value of such analysis tends to decline.

DATA ANALYSIS

The technical analysis of the fifty stocks that were listed in the s&p cnx nifty has been done here.

This is done by considering the data of the stocks for the past one year i.e. from 1 st of february,

2012 till 31st of january, 2013. The chart patterns and trends of the stocks were analyzed from the

data obtained. Chart patterns, and five different indicators which include volume, relative

strength index, moving average convergence & divergence, simple moving average, moving

average cross over were considered to analyze stock trends. Each indicator provided a buy or sell

decision for a given stock. After result was obtained from each indicator/ chart pattern, the

overall decision was arrived at. For a particular stock if majority of the indicators gave a same

signal as ‘buy’ or ‘sell’, then the overall decision was concluded to be the same.

The table below contains the analysis and the decision finally arrived at. Amongst these stocks

some stocks indicated strong sell or strong buy decision. These were the stocks for which at least

four indicators gave the same buy or sell signal. The graphs for the the top ten stocks with stong

buy/sell signals are presented below the table.

ScriptPattern

Simple Moving Average

Moving Average Crossover

MACD RSI

Volume

Overall Decision

Tata Motors Buy Sell Sell Buy Buy Buy BuyRanbaxy sell Buy sell sell sell sell sellrpower sell Buy Buy Buy sell Buy Buytata steel sell Buy Buy Buy sell Buy BuyAxis Bank sell Buy Sell Buy sell Sell sellAmbuja Cem Buy Buy NONE Buy Buy sell BuyDr.Reddys Buy Buy Buy Buy sell Buy BuyACC Buy Buy Sell Buy sell Buy Buyjindal sell sell Buy Buy sell Sell sellHDFC Buy Buy sell Buy sell Buy BuyGrasim Buy Sell Buy Buy Buy Buy Buy

gail sell Buy sell sellnone Buy sell

ongc none Buy Buy Buy sell Buy Buyhero moto none sell Buy Buy Buy Sell Buycairn Buy sell Buy Buy sell Sell Nonebajaj auto Buy sell sell Buy sell buy None

sbi Buy sell Buy Buy sell buy BuyContinuation

ScriptPattern

Simple Moving Average

Moving Average Crossover

MACD RSI

Volume

Overall Decision

pnb sell Buy Buy Buy sell Buy Buybpcl none sell Buy Buy sell sell sell

power grid none Buy Buy Buynone sell Buy

hdfc bank Buy Sell Buy Buy sell Buy Buyreliance none Buy Buy Buy sell Buy Buycipla Sell Buy Sell Buy Buy Buy Buyhcl tech Buy Buy Sell Buy Buy Buy Buysesa goa sell Buy Buy Buy sell sell nonetcs Buy Buy sell sell Buy Buy Buyhul Buy Buy sell sell Buy Buy Buyitc Buy sell sell none sell Buy Buysail sell Buy Buy Buy sell sell none

wipro none Buy Buy Buynone Buy Buy

infosys Buy Buy sell sell Buy Buy Buysiemens sell sell Buy Buy sell sell sellbharti airtel sell Buy Buy sell sell sell Sell

bhel sell sell sell nonenone Buy sell

reliance infra sell Buy sell Buy sell Buy nonetata power sell sell Buy Buy sell none sellsterline ind sell Buy Buy Buy sell Buy Buyjp associates sell Buy Buy Buy sell Buy Buyntpc sell Buy Buy Buy sell Buy sell

dlf none Buy Buy Buynone Buy Buy

rcom none Buy Buy Buy sell Buy Buyicici bank Buy Buy Buy Buy sell sell Buyidfc Buy Buy Buy Buy sell sell Buyhindalco sell Sell Sell Buy Buy Buy Nonecoal india Sell sell Buy Buy sell sell Sellsun pharma Buy Buy Sell Buy Buy Sell Buykotak bank Buy Buy Buy Buy Buy sell Buymaruti Buy Buy Buy Buy Buy Buy BuyLT Buy Buy Sell Sell sell Buy NoneM&M Buy Buy Sell Buy Buy Buy Buy

1. DR. REDDYS LABORATORIES

SCRIPT PATTERN

MO

V

AVG

CROSSOVE

R

MAC

D RSI

VOLUM

E

OVERALL

DECISION

DR.REDDY

S BUY BUY BUY BUY

BU

Y BUY BUY

This is the best stock of all to be invested in. This is because all the chosen indicators convey that

the stock is bullish and it is to be brought. The chart displays a higher high pattern of the stock’s

graph. It means it is bullish. The RSI is above 30. This is a bullish sign too. MACD is 24.21

which which indicates the stock is bullish. The Simple moving average conveys that the stock is

bullish as a full candle formed was only seen above the SMA line. The Moving Average

Crossover also coveys bullish sign as the 9 day moving average line is above the 27 day moving

average line. Very high volumes were traded recently clearly indicating the bullish nature of the

stock. As, sixr out of six factors considered convey that the stock is bullish, the overall decision

is that the stock is to be bought.

2. MARUTHI SUZUKI

SCRIPT PATTERN MOV CROSSOVER MACD RSI VOLUME OVERALL

AVG DECISION

MARUT

I BUY BUY BUY BUY BUY BUY BUY

Analysis of the stock:

The chart displays a higher high pattern of the stock’s graph. It means it is bullish. The RSI is

below 70. The stock is considered to be in bullish zone. MACD is 22.4 which indicates the stock

is bullish. The Simple moving average conveys that the stock is bullish as a full candle formed

was only seen above the SMA line. The Moving Average Crossover also coveys a bullish sign as

the 9 day moving average line is over the 27 day moving average line. Very high volumes were

traded recently clearly indicating the bullish nature of the stock. As, six out of six factors

considered convey that the stock is bullish, the overall decision is that the stock is to be bought.

3. HCL TECH

SCRIP

T PATTERN

MOV

AVG CROSSOVER MACD RSI VOLUME

OVERALL

DECISION

HCL

TECH BUY SELL BUY BUY BUY BUY BUY

The chart pattern is conveying a higher highs pattern . This is a positive trend. That indicates it is

bullish and therefore it conveys that the decision is buy. For this stock the RSI is 50 which

indicates a bullish trend. The Volume indicate a bullish trend. Though the average volume traded

is a bit on the lower side in the recent months a high volume is being traded. This is a positive

sign. The Simple moving average conveys that the stock is bearish as a full candle formed was

only seen below the SMA line. The Moving Average Crossover also coveys a bullish sign as the

9 day moving average line is above the 27 day maving average line. The MACD indicator gives

a Bullish sign as the MACD has a positive value it also indicates that the stock is bullish. As,

five out of six factors considered convey that the stock is bullish, the overall decision is that the

Grasim stock is to be bought.

4. MAHINDRA AND MAHINDRA

SCRIPT PATTERN

MOV

AVG CROSSOVER MACD RSI VOLUME

OVERALL

DECISION

M&M BUY BUY SELL BUY BUY SELL BUY

The chart pattern conveys that the overall trend is bullish. But a slight fall in the recent past was

seen , later though a recovery was also seen. If it would touch the 820 mark, that acts as a first

resistance level and the stock turns bearish. So, here as recovery was seen already the stock is

considered to be bullish. For this stock the RSI is abobe 30 which indicates a bullish trend. The

Volume indicate a bullish trend too. Though the average volume traded is a bit on the lower side

in the recent months a high volume is being traded. This is a positive sign. The Simple moving

average conveys that the stock is bullish as a full candle formed was only seen above the SMA

line. The Moving Average Crossover also coveys a bearish sign as the 9 day moving average line

is above the 27 day maving average line. The MACD indicator gives a Bullish sign as the

MACD has a positive value it also indicates that the stock is bullish. As, five out of six factors

considered convey that the stock is bullish, the overall decision is that the stock is to be bought.

5. RANABAXY LABORATORIES

SCRIPT

PATTER

N

MOV

AVG

CROSSOVE

R MACD RSI VOLUME

OVERALL

DECISION

RANBAX

Y SELL SELL SELL SELL BUY BUY SELL

Analysis of the stock:

The chart displays a lower lows pattern of the stock’s graph. It means it is bearish. The RSI is

below 70. The stock is considered to be in bullish zone. MACD is negative and at -13.86, which

indicates the stock is bearish. The Simple moving average conveys that the stock is bearish as a

full candle formed was only seen below the SMA line. The Moving Average Crossover also

coveys a bearish sign as the 9 day moving average line is below the 27 day moving average line.

Very high volume was traded recently clearly indicating the bullish nature of the stock. As, four

out of six factors considered convey that the stock is bullish, the overall decision is that the stock

is to sold.

6. SUN PHARMA

SCRIPT

PATTER

N

MOV

AVG

CROSSOV

ER

MAC

D

VOLUM

E

OVERALL

DECISION

SUN

PHARM

A BUY BUY SELL BUY SELL BUY

Analysis of Data:

For this stock the RSI is above 30 which indicates a buy decision. The chart pattern is conveying

a positive trend. That indicates it is bullish and therefore it conveys that the decision is buy. The

Volume is less as the trade has been too little over the past, so it gives a bearish signal. The

Simple moving average conveys that the stock is bearish as a full candle formed was only seen

above the SMA line. The Moving Average Crossover also coveys a bearish sign as the 9 day

moving average line is below the 27 day moving average line. The MACD indicator gives a

Bullish sign as the MACD has a positive value it also indicates that the stock is bullish. As, four

out of six factors considered convey that the stock is bullish, the overall decision is that the Sun

Pharma stock is to be bought.

7. GRASIM

SCRIPT PATTER MOV CROSSOVE MACD RSI VOLUME OVERALL

N AVG R DECISION

GRASI

M BUY SELL SELL BUY BUY BUY BUY

The chart pattern is conveying a positive trend. That indicates it is bullish and therefore it

conveys that the decision is buy. For this stock the RSI is around 30 which indicates a bullish

trend. Actually this signal can be considered to be a bit weak as the RSI may come down to

below 30 very fast. The Volume is high as the trade has been good and above average for the

past few months, so it gives a bullish signal. The Simple moving average conveys that the stock

is bearish as a full candle formed was only seen below the SMA line. The Moving Average

Crossover also coveys a bullish sign as the 9 day moving average line is below the 27 day

maving average line. The MACD indicator gives a Bullish sign as the MACD has a positive

value it also indicates that the stock is bullish. As, four out of six factors considered convey that

the stock is bullish, the overall decision is that the Grasim stock is to be bought.

8. TATA MOTORS

SCRIPT PATTERN

MOV

AVG CROSSOVER MACD RSI VOLUME

OVERALL

DECISION

TATA

MOTOR

S BUY

SEL

L SELL BUY

BU

Y BUY BUY

The graph stands above 300 at present. But a weak trend was slightly shown recently although

the stock was bullish all the time. If in future ince if the graph touches the 260 marks, it acts as a

resistance level for the stock to turn bearish. So, as of now the chart pattern conveys it is a

bullish stock. For this stock the RSI is above 30 which indicates a bullish trend. The Volume

indicate a bullish trend too as higher volumes were traded recently. The Simple moving average

conveys that the stock is bearish as a full candle formed was only seen below the SMA line. The

Moving Average Crossover also coveys a bearish sign as the 9 day moving average line is above

the 27 day moving average line. The MACD indicator gives a Bullish sign as the MACD has a

positive value it also indicates that the stock is bullish. As, four out of six factors considered

convey that the stock is bullish, the overall decision is that the stock is to be bought.

9. AMBUJA CEMENT

SCRIPT

PATTER

N

MOV

AVG CROSSOVER MACD RSI VOLUME

OVERALL

DECISION

AMBUJ

A CEM BUY BUY NONE BUY BUY SELL BUY

Though the graph conveys a flat trend, the stock is seen to gain slight strength in the last one

month. But of the hraph hits the 190 mark again which acts as resistance, it would drop to a

stron resistance2 which is at 180 and totally turns bearish. SO, as of now it is considered to be

positive because of the slight recovey shown. For this stock the RSI is above 30 which indicates

a bullish trend. The Volume indicates a bearish trend as lesser volumes were traded recently. The

Simple moving average conveys that the stock is bearish as a full candle formed was only seen

below the SMA line. The Moving Average Crossover also coveys no sign as the 9 day moving

average line is meets the 27 day moving average line. The MACD indicator gives a Bullish sign

as the MACD has a positive value it also indicates that the stock is bullish. As, four out of six

factors considered convey that the stock is bullish, the overall decision is that the stock is to be

bought.

10. KOTAK MAHINDRA BANK

SCRIPT PATTERN

MOV

AVG

CROSSOVE

R MACD RSI VOLUME

OVERALL

DECISION

KOTAK

BANK BUY BUY NONE BUY

BU

Y SELL BUY

The chart displays a higher high pattern of the stock’s graph. It means it is bullish. The RSI is

nearer to 70. This is always dangerous. But asit still not has crossed 70, the stock is considered to

be in bullish zone. MACD is 5.11 which which indicates the stock is bullish. The Simple

moving average conveys that the stock is bullish as a full candle formed was only seen above the

SMA line. The Moving Average Crossover also coveys no sign as the 9 day moving average line

is aligned with the 27 day moving average line. Very high volumes were traded recently clearly

indicating the bullish nature of the stock. As, four out of six factors considered convey that the

stock is bullish, the overall decision is that the stock is to be bought.

CONCLUSION

The project gives an exposure to the Securities Market in India. The components of the securities

market like the Pimary Market, Secondary Market and Derivative Market are known in detail.

Learning form the project includes understanding the different types of Technical indicators

available for performing technical analysis of stocks. How to make use of each indicator is also

being explained. Various factors which affect the stock market like the Economic growth, Lower

interest rates, Stability, Confidence & Expectations, Bandwagon effect, related markets were

also highlighted.

The Analysis of the CNX NIFTY Stocks has been done as a part of the project. The Analysis

concluded that the majority of the stocks could not get very strong indications i.e. to buy or to

sell. Only two stocks namely Maruthi Suzuki and Dr. Reddy’s laboratories are the stocks with

very strong bullish trends. The six technical tools considered gave the same result that the stock

is bullish for both of. Then the stocks like HCL Tech and Mahindra & Mahindra had five

Technical indicators alone giving out the same result as bullish. Then the rest of the stocks had

either four indicators or three indicators in favor of a same result. Amongst the stocks selected,

the top ten stocks recommended for investment are Maruthi Suzuki, Dr. Reddys, Hcl Tech,

Mahindra Finance, Ranbaxy Laboratories, Sun Pharma, Grasim, Tata Motors, Ambuja Cement

and Kotak Mahindra Bank. Amongst these top ten stocks recognized, only there is one stock i.e.

Ranbaxy laboratories which is having a bearish trend. The rest of the stocks are bullish only.

This conveys that the overall market is very bullish and much favorable for investments.

Of the total 50 stocks in the S&P CNX NIFTY, 32 stocks are bullish and 11 stocks are bearish.

The remaining seven stocks conveyed no result. Their performance is stable. Here 64% of the

stocks are bullish while only 22% of the stocks are bearish. So, not alone the top ten stocks, but

the overall index also conveys that the overall market is bullish. Even investing in the bullish

stocks is gainful as one use the short option available carefully to gain profits.

So, the S&P CNX NIFTY stocks are the one of the best investment options available as the gains

could be very high. Especially investing in the bullish stocks would be very beneficial.

6.3 Suggestions for further study

The project was confined only to the study of derivatives strategies in the Indian Market.

Apart from the analysis done, stocks can be analyzed on the basis of various other

indicators of technical analysis or on the basis of the fundamental analysis.

The index considered here is not alone the best investment avenue available. Even other

stock of other indexes may yield good returns.

The technical indicators can be utilized even for the study of Derivatives market and even

for the commodities market etc.

The opportunity cost of capital and the returns from investing elsewhere can be

calculated and compared with the investment made in stocks.

Apart from the factors explained in the project which would effect the stock market,

many other factors also may exist.

BIBILIOGRAPHY

Books:

A.K.Sharma & G.S. Batra (2008), Indian Stock Market. Deep & Deep Publications Pvt.

Ltd

Ajay Shah, Susan Thomas, Michael Gorham (2008), India’s Financial Markets. Elsevier

Bharati V. Pathak, Pathak Bharati V. (2011), The Indian Financial System, Third Edition,

Dorling Kindersley (india) Pvt.ltd

Charles Kirkpatrick II, Julie R. Dahlquist (2011), Technical Analysis, Second Edition.

Pearson Education Inc.

Robert D. Edwards, John Magee, W.H.C. Bassetti, (2007), Tecjnical Analysis of Stock

trends, Ninth Edition. CRC Press

V. Raghunathan, Prabina Rajib (2007), Stock Exchanges, Investments and Derivatives,

Third Edition, Tata McGraw-Hill Publishing Company limited

Websites:

http://www.nseindia.com/products/content/equities/equities/equities.htm

http://www.moneycontrol.com/india/stockpricequote/autocarsjeeps/marutisuzukiindia/MS24

http://nseguide.com/stocksearch.php?name=reliance

http://www.indiainfoline.com/

http://www.nseindia.com/content/indices/ind_cnx_nifty.pdf

http://www.sharetipsinfo.com/factoraffecting-stockprice.html

http://smallbusiness.chron.com/economic-factors-affect-stock-market-3942.html#gsc.tab=0

http://nifty50live.stockforyouindia.com/

http://www.investopedia.com/university/technical/

http://www.technicalanalysisofstocks.in/

http://www.investing.com/technical/moving-averages

http://www.niftydirect.com/nsebse/market-gyan/Learning%20Session%205th.pdf