Technical Analysis Presented by Inderpal Singh. What is Technical Analysis? Technical analysis is the attempt to forecast stock prices on the basis of

Presented by Inderpal Singh

Technical Analysis


What is Technical Analysis?

• Technical analysis is the attempt to forecast stock prices on the basis of market-derived data.

• Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time.

• They are looking for trends and patterns in the data that indicate future price movements.


Premises of Technical Analysis• Market action discounts everything.– All relevant information are already reflected in

the market price and any new information will impact the price as soon as they are released.

• Prices move in trends.– Up, Down, No trend (Trading Range or Sideways)– A trend is in effect until it reverses.

• History repeats itself.– Patterns in human psychology do not change.


‘The charts and graphs are used as the basic tools to identify the

trends in prices.’


Dow theory is based on the hypothesis that the stock market does not perform on a random basis. Rather, it is guided by some specified trends. The likely market trend in future can be predicted by following these trends. Three types of specific trends have been named in Dow theory. These are:

(a) Primary Trends – It is a long range trend in price and may carry on even for number of years. It takes the entire market up or down. It may be characterized as bullish or bearish in nature.

Dow Theory


(b) Secondary Trend- Secondary trend or trends appear within a primary trend may last for few days or few weeks or few months. Secondary trends show interruption in primary trend and act as a restraining force on the primary trend. The secondary trend tend to correct deviations from the primary trend boundaries of price movements.

(c) Minor Trend – minor trends refer to day-to –day trend or movements in prices over few days. The minor trend, being of very short duration, have little analytical value.


Bull Market- when new highs are reached after every secondary corrections.

Primary trend : upward Secondary trend : corrections successive high points

are higher than the previous highs and successive low points are also higher than the previous lows.

Bear Market- when new lows are reached after every secondary corrections.

Primary trend : Downward Secondary trend : corrections successive lows are

lower than previous lows and successive highs are also lower than previous highs.


Elliot Wave Theory Basic proposition of this theory is that the stock

prices in the market can be described as a set of wave patterns. It states that the long-term major patterns may consist of five successive steps or five waves. In case of bull market, the set of five waves is as follows: the first wave is upward, the second is downward, the third is upward, the fourth is downward and the fifth is upward. In case of bear market, the reverse pattern follows i.e. downward, upward, downward, upward and downward.



Wave 1. The stock price make initial move upwards. This may be caused by a relatively small number of people that all of the sudden feel that the previous price of the stock was cheap and therefore it is worth buying and thus causing the price to go up.

Wave 2. The stock is considered overvalued and enough investors who were in the original wave to consider that the stock was overvalued take profits. This causes the stock to go down. However , the stock will not make it to its previous lows.

Wave 3. This may be the longest and strongest wave. More investors find out about the stock and they buy it for a higher and higher price. This wave usually exceeds the tops created at the end of wave 1.


Wave 4. At this point, investors again take profits because the stock is again considered expensive. This wave tends to be weak because there are usually more investors that are still bullish on the stock.

Wave 5. This is the point that most investors are driven by hysteria. They will come up with lots of reasons to buy the stock which has very little negative news. Consequently, the stock becomes overpriced. At this point, the stock will move into one of two patterns.


Price and Volume Charts

• Bar Chart• Line Chart• Point and Figure Chart• Candlestick Chart


Bar Chart

One of the basic tools of technical analysis is the bar chart, where the open, close, high, and low prices of stocks or other financial instruments are embedded in bars which are plotted as a series of prices over a specific time period. Bar charts are often referred to as OHLC charts (open-high-low-close charts) to distinguish these charts from more traditional bar charts used to depict other types of data.


Line Chart

A style of chart that is created by connecting a series of data points together with a line. This is the most basic type of chart used in finance and it is generally created by connecting a series of past prices together with a line.


Point and Figure Chart Point and figure (P&F) is a charting technique used

in technical analysis. Point and figure charting is unique in that it does not plot price against time as all other techniques do. Instead it plots price against changes in direction by plotting a column of Xs as the price rises and a column of Os as the price falls.

The amount by which a price must differ from the last price

before it is recorded is known as the box size. A box is also often called a point, hence the name of the chart. All prices are recorded as multiples of the box size; any fractional component is dropped. So if the box size is $1 and a stock rises by more than $1 to $15.99, then the price is marked as an X at the $15 level; it is not rounded up to $16.


• Buy signal if X lines are moving up after every O lines – Bullish Market

• Sell signal if O lines are going down after every X line- Bearish Market


Candlestick A chart that displays the high, low, opening and closing prices

for a security for a single day. The wide part of the candlestick is called the "real body" and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher).

The candlestick's shadows show the day's high and lows and

how they compare to the open and close. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices.





Price pattern analysiso Simple Moving Averageo Exponential Moving Averageo Moving Average Convergence Divergenceo Relative Strength Analysiso Rate of Change


Simple Moving Average

A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.


Exponential Moving Average (EMA)

The Exponential Moving Average (EMA) weighs current prices more heavily than past prices. This gives the Exponential Moving Average the advantage of being quicker to respond to price fluctuations than a Simple Moving Average; however, that can also be viewed as a disadvantage because the EMA is more prone to whipsaws (i.e. false signals).

Video http://www.investopedia.com/video/play/sma-versus-ema/

http://www.investopedia.com/video/play/sma-versus-ema/


Moving Average Convergence Divergence

A trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.

Video http://www.investopedia.com/video/play/moving-average-convergence-divergence-macd/

http://www.investopedia.com/video/play/moving-average-convergence-divergence-macd/

http://www.investopedia.com/video/play/moving-average-convergence-divergence-macd/


Relative Strength Index - RSI

A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:

RSI = 100 - 100/(1 + RS*) *Where RS = Average of x days' up closes / Average of x days' down closes.

An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.

Videohttp://www.investopedia.com/video/play/relative-strength-index-rsi/

http://www.investopedia.com/video/play/relative-strength-index-rsi/


Many traders use a value greater than zero to indicate an increase in upward momentum and a value less than zero to indicate an increase in selling pressure. However, some of the most valuable signals are generated when the price of the asset and the ROC are heading in opposite directions (known as divergence). For example, in the chart above you can see that the ROC is sloping downward while the price of the asset is increasing. This is generally an early indication that a sharp decline may be on the way.


Indicator analysis

• Breadth of the Market• Put-Call Ratio• Short Sales Position


Breadth Indicator A mathematical formula that uses advancing and declining

issues to calculate the amount of participation in the movement of the stock market. By evaluating how many stocks are increasing or decreasing in price and how many trades investors are placing for these stocks, breadth indicators can show whether overall market sentiment is bullish (positive market breadth) or bearish (negative market breadth).

Investors can also use breadth indicators to evaluate the

behavior of a particular industry or sector, or to analyze the magnitude of a rally or retreat.


Put/Call Ratio

The Put/Call Ratio is a measure of bearish or bullish sentiment in the market. A reading above 1.0 indicates that options traders are purchasing more Puts than Calls, in anticipation of the market falling in the near future. A reading below 1.0 indicates that options traders are purchasing more Calls than Puts, in anticipation of the market rising in the near future. The CrystalBull Put-Call Ratio Timing Indicator seeks to find overbought and oversold conditions based on trader sentiment.


• http://www.youtube.com/watch?v=ysas8DO9mWI

http://www.youtube.com/watch?v=ysas8DO9mWI

http://www.youtube.com/watch?v=ysas8DO9mWI

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Technical Analysis Presented by Inderpal Singh. What is Technical Analysis? Technical analysis is the attempt to forecast stock prices on the basis of