Sapm 4 Technical Analysis By Ankur Mittal
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Technical Analysis •
Technical Analysis is the name given to forecasting techniques that utilize historical share price data
•
It believes that share/security prices are determined by demand and supply forces that operate in the market which are in turn influences also by emotional and psychological factors.
•
They make price predictions on the basis of price and volume data looking for patterns and possible correlations This analysis is based on tree assumptions
•
The market discounts everything
•
Prices move in trends
•
History tends to repeat itself
Tools of Technical Analysis •
Charting Line Chart Bar Charts Candlestick Charts
•
Technical indicators
•
Sentiment Indicators
•
Flow of Fund Indicators
•
Market Structure Indicators
Certain Terminologies • Trend Trend is the direction of movement of share prices in the market. Rising : Upward/Uptrend (Higher Highs; Higher Lows) Declining :Downward/Downtrend (Lower Lows; Lower Highs) • Support: It is a value below which stock price is not expected to go down as demand is expected to increase. Support level is a level at which sufficient buying pressure exerted to halt fall in prices • Resistance : It is a value at which stock price is not expected to go as supply is expected to increase. Resistance level is a level at which sufficient selling pressure is exerted to halt the ongoing rise in price of a share. Both these are reversal movements
Dow Theory Charles Dow, Editor, Wall Street •
It recognizes the it is the action of the people in the market place responding to news that cause prices to change rather than the news itself & that
•
Once established a market trend tends to continue
Assumptions •
The Averages discounts every thing i.e. it takes every thing that is known by all market participants in to account
•
The market is comprised of three trends Primary Trend, Secondary Trend (Temp. Reactions) & Minor Trend
•
Primary trends have three phases Eco. Recovery, Enhanced Corporate Earning & Further Momentum
•
The volume confirms the trend. i.e. It expands in the same direction of Primary Trend
•
A trend remains intact until it gives a definite reversal signal
A Chart Pattern •
It sets a general pattern about a motion of certain price movement
•
There are two types of patterns; Reversal & Continuation
•
Head and Shoulder Head & Shoulder top is formed at the high of a long upward trend. movement when prices touch the top under a strong buying impulse. Then it little goes down. Usually occurs at the end of a bull phase & is indicative of a reversal of trend. Head & Shoulder (Inverse) bottom gives a signal that there is going to be a reversal in the downtrend. It occurs at the end of bear phase
•
Cup and Handle It is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed
Primary Trend and secondary reactions.
Y Prices
Primary Trend
Secondary reactions
Secondary reactions
O
Days
X
Three phases of a bull market
Y Prices T3 T2 T1
Phase 3
Phase 2
Phase 1 B2 B1 (Revival of Confidence)
O
(Improvement in corporate earnings)
(Speculation and inflation)
Days
X
Technical Indicators Also known as Mathematical Indicators •
They measure money flow, trends, volatility and momentum
•
They serve two purposes To confirm price movements To form buy and sell signals
•
They arrive at by applying a formula to the price and/or volume data of a security
•
Trend Following Indicators
•
Moving Averages It is a lagging indicator represents an average of a certain series of data that moves through time.
•
Moving Average Convergence Divergence (MACD) It measures short term momentum It is made up of two exponential moving averages It helps in signaling out bullish & bearish trend
Fundamental & Technical Analysis A Comparison •
1. Charts Vs Financial Statements TA is a study of price action & trend. FA focuses on demand/supply relationship to calculate intrinsic value. FA uncovers a company’s value FA believes they are already accounted for in Company’s stock prices
• • • •
2. Time horizon FA takes a longer term view TA has a time frame of weeks, days or minutes. Data analyzed by FA are released over a period of time, while that by TA are published on daily basis.
• •
3. Trading Vs Investing Goals are different. FA is for investment. TA is for trade
• • • •
4. Cause Vs Effect FA studies causes of market movement; TA needs to know why the prices have moved. A Combination of the two is ideal Neither of them is perfect or independent. FA suggest best security to sell/buy; while TA suggests best time to sell/buy. Thus both are supplementing each other.
Red Candlestick
Highest Price Opening Price
Closing Price Lowest Price
Green Candlestick
Highest Price Closing Price
Opening Price Lowest Price
Technical Analysis is the name given to forecasting techniques that utilize historical share price data
•
It believes that share/security prices are determined by demand and supply forces that operate in the market which are in turn influences also by emotional and psychological factors.
•
They make price predictions on the basis of price and volume data looking for patterns and possible correlations This analysis is based on tree assumptions
•
The market discounts everything
•
Prices move in trends
•
History tends to repeat itself
Tools of Technical Analysis •
Charting Line Chart Bar Charts Candlestick Charts
•
Technical indicators
•
Sentiment Indicators
•
Flow of Fund Indicators
•
Market Structure Indicators
Certain Terminologies • Trend Trend is the direction of movement of share prices in the market. Rising : Upward/Uptrend (Higher Highs; Higher Lows) Declining :Downward/Downtrend (Lower Lows; Lower Highs) • Support: It is a value below which stock price is not expected to go down as demand is expected to increase. Support level is a level at which sufficient buying pressure exerted to halt fall in prices • Resistance : It is a value at which stock price is not expected to go as supply is expected to increase. Resistance level is a level at which sufficient selling pressure is exerted to halt the ongoing rise in price of a share. Both these are reversal movements
Dow Theory Charles Dow, Editor, Wall Street •
It recognizes the it is the action of the people in the market place responding to news that cause prices to change rather than the news itself & that
•
Once established a market trend tends to continue
Assumptions •
The Averages discounts every thing i.e. it takes every thing that is known by all market participants in to account
•
The market is comprised of three trends Primary Trend, Secondary Trend (Temp. Reactions) & Minor Trend
•
Primary trends have three phases Eco. Recovery, Enhanced Corporate Earning & Further Momentum
•
The volume confirms the trend. i.e. It expands in the same direction of Primary Trend
•
A trend remains intact until it gives a definite reversal signal
A Chart Pattern •
It sets a general pattern about a motion of certain price movement
•
There are two types of patterns; Reversal & Continuation
•
Head and Shoulder Head & Shoulder top is formed at the high of a long upward trend. movement when prices touch the top under a strong buying impulse. Then it little goes down. Usually occurs at the end of a bull phase & is indicative of a reversal of trend. Head & Shoulder (Inverse) bottom gives a signal that there is going to be a reversal in the downtrend. It occurs at the end of bear phase
•
Cup and Handle It is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed
Primary Trend and secondary reactions.
Y Prices
Primary Trend
Secondary reactions
Secondary reactions
O
Days
X
Three phases of a bull market
Y Prices T3 T2 T1
Phase 3
Phase 2
Phase 1 B2 B1 (Revival of Confidence)
O
(Improvement in corporate earnings)
(Speculation and inflation)
Days
X
Technical Indicators Also known as Mathematical Indicators •
They measure money flow, trends, volatility and momentum
•
They serve two purposes To confirm price movements To form buy and sell signals
•
They arrive at by applying a formula to the price and/or volume data of a security
•
Trend Following Indicators
•
Moving Averages It is a lagging indicator represents an average of a certain series of data that moves through time.
•
Moving Average Convergence Divergence (MACD) It measures short term momentum It is made up of two exponential moving averages It helps in signaling out bullish & bearish trend
Fundamental & Technical Analysis A Comparison •
1. Charts Vs Financial Statements TA is a study of price action & trend. FA focuses on demand/supply relationship to calculate intrinsic value. FA uncovers a company’s value FA believes they are already accounted for in Company’s stock prices
• • • •
2. Time horizon FA takes a longer term view TA has a time frame of weeks, days or minutes. Data analyzed by FA are released over a period of time, while that by TA are published on daily basis.
• •
3. Trading Vs Investing Goals are different. FA is for investment. TA is for trade
• • • •
4. Cause Vs Effect FA studies causes of market movement; TA needs to know why the prices have moved. A Combination of the two is ideal Neither of them is perfect or independent. FA suggest best security to sell/buy; while TA suggests best time to sell/buy. Thus both are supplementing each other.
Red Candlestick
Highest Price Opening Price
Closing Price Lowest Price
Green Candlestick
Highest Price Closing Price
Opening Price Lowest Price
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