Introduction

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.

Introduction

The technicians believes the forces of demand and supply are reflected in price and volume of trading.

By examining these patterns he predicts whether prices are moving higher or lower and even by how much.

Introduction

Technical analysis can be used as a support to fundamental analysis.

Fundamental analysis allows the analyst to forecast holding period return and riskiness to achieve that return, but these figures alone do not prompt buy and sell action

Technical analysis may be useful in signaling buy and sell action.

Introduction

The technician must

Identify the trend

Recognize when one trend comes to an end and price starts in opposite direction.

His central problem is to distinguish between reversals within a trend and real changes in the trend itself.

introduction

This problem of price change is critical because price does not change in smooth and uninterrupted fashion.

The use of technical indicator to measure overall market direction should precede any technical analysis of individual stock.

Dow Theory

This theory was first stated by Charles H Dow in a series of columns in the between 1900 and 1902.

He Formulated a hypothesis that the stock market does not perform on random basis but is influenced by three distinct cyclical trends that guides the general direction.

Dow Theory Trends (1)

Primary Trend (Major Trend) Called “the tide” by Dow, this is the trend that

defines the long-term direction (up to several years). Others have called this a “secular” bull or bear market.

Secondary Trend (Intermediate Trend) Called “the waves” by Dow, this is shorter-term

departures from the primary trend (weeks to months) Day to day fluctuations (Minor Trend)

Not significant in Dow Theory

Dow Theory

Dow Theory

Bull market: a bull market is in process when successive highs are reached after secondary corrections.

Bear market: opposite to it.

Trends Have three phases

The Market Cycle

Accumulation Phase

Participation Phase (Bullish / Bearish)

Distribution Phase (Excess, Panic, ranging)

Phase 1

The accumulation phase (phase 1) is a period when investors "in the know" are actively buying (selling) stock against the general opinion of the market. During this phase, the stock price does not change much because these investors are in the minority demanding (absorbing) stock that the market at large is supplying (releasing)

Phase 2

Eventually, the market catches on to these astute investors and a rapid price change occurs (phase 2). This occurs when trend followers and other technically oriented investors participate.

Phase 3

This phase continues until rampant speculation occurs. At this point, the astute investors begin to distribute their holdings to the market (phase 3).

Trends Are Confirmed by Volumes

Bearish Trend (Every low is less than the previous low)

Drawing Bar Charts

Each bar is composed of 4 elements: Open High Low Close

Note that the candlestick body is empty (white) on up days, and filled (some color) on down days

Open

Close

High

Low

StandardBar Chart

JapaneseCandlestick

Open

Close

High

Low

StandardBar Chart

JapaneseCandlestick

Drawing Point & Figure Charts

Point & Figure charts are independent of time.

An X represents an up move. An O represents a down

move. The Box Size is the number of

points needed to make an X or O.

The Reversal is the price change needed to recognize a change in direction.

Typically, P&F charts use a 1-point box and a 3-point reversal.

XXXXX

OO

XXXX

OOOO

P& F chart

NIFTY P& F chart

Double Top Break Out

Triple Break Out

Support & Resistance

Support and resistance lines indicate likely ends of trends.

Resistance results from the inability to surpass prior highs.

Support results from the inability to break below to prior lows.

What was support becomes resistance, and vice-versa.

Support Resistance

Breakout

Resistance & support

Resistance & Support

The foundation of most technical analysis tools is rooted in the concept of supply and demand. 

Resistance is equivalent to a "supply" line.  When prices increase, the quantity of sellers also increases as more investors are willing to sell at these higher prices.

Resistance & support

Support is equivalent to a "demand" line.  When prices decrease, the quantity of buyers increases as more investors are willing to buy at lower prices.

Market indicators

Price indicators

1.Breadth of market

2. New highs and Lows

Volume Indicators

Volume changes are believed by most technicians to be prerequisite to any change in price.

Market indicators

Volume indicators

Short selling

Odd Lot Trading

Short Selling

A technical indicator , short selling is called short interest ratio .

This theory suggest that short seller must eventually cover its position. This increases the buying activity.

Monthly short interest can be divided with average daily volume during the previous month.

This ratio indicates how many days it will take to cover short interest.