Techinical Analysis

SECURITY ANALYSIS AND PORTFOLIO MANAGEMENT

TECHINICAL ANALYSIS OF HERO HONDA

SUBMITTED TO Prof. AVIJAN DUTTA

Submitted by:

NAME: NISHANT LOMASH ROLL NO: 07/MBA/45

DEPARTMENT OF MANAGEMENT STUDIES

NATIONAL INSTITUTE OF TECHNOLOGY DURGAPUR

INDEX 1. INTRODUCTION………………………………………………………………………………………..………………..3 2. SUPPORT AND RESISTANCE ………..………………………………………………………………………………4 3. CANDLE STICKS……………………………………………………………………………………………………………5 4. MOVING AVERAGES………………………………………………………………………………………….…….….9 a. SIMPLE MOVING AVERAGE……………………………………………………………..............………………9 b. EXPONENTIAL MOVING AVERAGE………………………………………………………………………………13 b. BUYING AND SELLING POINTS…………………………………………………………………………………….14 5 .VOLUME …………………………………………………………………………………………………………………….17 6. MOVING AVERAGES CONVERGENCE/ DIVERGENCE (MACD)………………………………..….…20 7. %K & %D…………………………………………………………………………………………………………..………..28 8. RSI………………………………………………………………………………………………………………..…….……...31 9. COMBINING VARIOUS FACTORS …………………………………………………….……………………….....32 10.PORTFOLIO…………………………………………………………………………………………………………...…...34 11. RESULTS…………………………………………………………………………………………………………………….39

INTRODUCTION:

Technical Analysis of Hero Honda is based on stock price of Sensex data from August 2004 till 17th October 2008. In this techinical analysis various methods and variables are used to analyse the market conditions. And multiple components are also used to analyse the market trends and position of buy ,sell or hold the share.

SUPPORT AND RESISTANCE: Fig: Price chart 2007-2008 using F-chart

From the above figure obtained we can see that there is a strong resistence at a range at alevel of 765-785 during the year 2007 and sustained till April -2008. The resistence got broken in April-2008 this could be the effect of budget speach as it was very positive for the year 2008-2009. We can even see that the new resistance was formed at Rs850-885 level from May-October 2008. We even find a strong support at Rs.625-635 level which after the budget moved on to Rs.635-650 level. In the budget speech there was a decleration of cut in Excise duty for two-wheelers from 16% to 12%. And special advantages for batery run vehicles. Apart from this More corpus provided for rural infrastructure development fund will ultimately become beneficial to Auto-mobile industry as improved infrastructure activities like developed roads, bridges, etc will benefit to Auto-mobile industry. We can see a trend of heavy bull in the month for July-August 2008. The share price have increase from Rs.635 to Rs 886 in these two months.

CANDLE STICK CHARTS:

In the above diagram we can see that after heavy fall in MarchAugust2006, Nov-2006 to April 2007 and May-June2008 there is a bullish trend in July- August 2008. This is shown by the trend lines. Also we see a heavy bull in July-September 2008. There is a range in month of May 2007-April 2008. The trading can be done in these to range. The values lying out of the top range are signifying over bought shares and below the bottom line is signifying bottom over sold. Fig: July-October 08 candle sticks:

Gravestone doji.

Black umbrella

Longlegged doji.

Star

In the above candle stick charts we can see the various types of candle stick and pattern known. Long-legged doji line often signifies a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large. Gravesrone doji line also signifies a turning point. It occurs when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices. Stars indicate reversals. A star is a line with a small real body that occurs after a line with a much larger real body, where the real bodies do not overlap. The shadows may overlap. Star is a bullish pattern signifying a potential bottom. The "star" indicates a possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in.

MOVING AVERAGE: SMA: 200 days: The graph below shows the two lines one is of 200 days moving average and other of sensex daily data. The SMA chart shows that some buy and sell signals in this graph.

This share price of hero Honda is showing a sell signal after 29th march 2006 and after that a buy signal on 29th Sept 2007 and once again a sell signal on 29th oct-2007 . After this in recent months a strong buy signal on 3rd Feb. 2008. A sell signal on 1st march 2008. Then a strong buy signal 10th may 2008 and a sell signal on 29th June 2008. Again a buy signal on 29th July 2008.

10 days:

In this graph for 10 days we can see that 23rd jan we can see that there is a buy signal at 668.86 but on a later stage at 728.25 on 5th Feb 2008.again on 14th feb there is a buy signal at 714.54 and sell at 10th march 755.305. once again a buy signal at at 25th march 2008 at 705.6 and a sell at 7th may at 817.34. Apart from this on 18th july 2008 there is a buying signal at 679.35 and a sell signal at 811.29 on 12th aug 2008. There is another buy signal on 25th Aug at 804.25 and 10 sep at 842.35 points.

9 DAYS SMA: Fig: SMA using F Charts

According to the above figure we can see that one can buy at Rs.636 on 16July 2008 and it is over bought at Rs.883 on 6th october 2008 where the share can be sold.

EXPONENTIAL MOVING AVERAGE: Fig: Exponential moving averages

This is figure showing various buy and sell signals, in the figure we the EMA 13 days line is crossing for many times the daily price line.

BUYING AND SELLING: Fig:Outliers using F-charts

In the above figure there are various buy and sell points given through lines and arrows marked. We can even see the broken resistance on 24th April 2008 at Rs.765 . the new resistance level formed by this level was at Rs.835. The line at top shows various selling points and line at bottom indicates various buying points. Fig: Entry and exit points

From the green arrows shown we can find various entry(buying) and exit(selling) points from the period of Feb 2008 to october 2008. Here the red line shows SMA (simple moving average) and helps in finding out if the share is over or under priced. Using SMA as an indicator we can find buying and selling points. There are green arrows indicating entry and exit points for maximum gain. The SMA helps in kowing if the share is over valued or under valued.

VOLUME:

Indecisive

Trend change Accumulation

Volume is another important indicator of details of share prices. As the volume is very low then it tells that either the traders are indecisive or there can be accumulating the shares for coming peeks or bulls. If the volumes are very low (nearing to zero) then it even shows that there can be a change in trend expected very soon. Accumulation of shares also takes place only when investors expect high raise in prices.

Heavy trading

Fig: Accumulation using F-charts

Low volumes

Accumulation of shares

In the figure we can see accumulation of shares as volumes are low and prices is decreasing a little for the coming bullish trend and short sell in future. The two boxes in which first there is bull and then accumulation takes place and once again bullish trend starts. At this point in April and August 2008 the volumes are also quite low. All together this even explains MACD were not too diverging at the point of accumulation and in later stage it got diverge where prices were too high and then correction took place. Most of the traders were holding and not selling shares at this point of time.

MACD: Fig: MACD graph as leading indicator.

In the above figure forms F-chart using circle there are marked MACD signal at zero and at all these points the prices are either very high or very low, and it is seen that the trend reversal takes place after this point when MACD is near to zero. And also MACD is leading indicator of change and price variations takes place later. This is considered to be a very important indicator of share prices evaluation on a short term bases (i.e. for Technical analysis). The above figure shows that the zero MACD indicators in the diagram shown a week ahead the trend is going to change. This trend reversal is shown by the lines joining (black line form MACD to share prices) the share price of Hero Honda and the MACD signal line (Red line) at zero. As on 17th October 2008 the value of MACD is going to be zero the trend is once again going to change but still it is expected to take one or two days as the value of MACD is not so close to zero.

Fig: Showing change in trend using MACD

Indicating change in trend

Indicating change in trend is soon going to take place

In the figure on previous page we can see that, there are lines where the MACD signal is moving in opposite direction of the stock prices which particularly means that trend is going to change very soon. This is because the share is either highly over bought or over sold and hence is bullish or bearish phase is going to be finished soon.

Fig: 2yrs graph for MACD buy and sell signal

Fig: 1 yr graph for buy and sell

SELL

BUY

MACD is a very good indicator of buy and sell signal too. As the averaged center line MACD (blue line) crosses the MACD signal (red line) from bottom to top it gives a buy signal as an assumption that the prices will start rising. And as the line crosses from top to bottom then it’s a sell signal. Both the buy and sell signal are indicated in the figure given above. The MACD indicator is accurate to 80% only so there can be chance of failure in buy-sell signal given by MACD, 20% of the times. This is the reason never only one indicator is to be looked in for trading. For increasing the profit one can even look on these graphs of MACD to find Convergence and divergence, which show if he price is to bullish or bearish at this point of time. It is shown on the next page figure.

Fig: over priced and under price indications using divergence

VERY UNDER PRICED

VERY OVER PRICED

These arrows used to mark high divergence and so the price of stock here is either too high or too low. This gives the point of short buying or selling at various points of times in a year.

%K & %D: FAST %K AND %D: The graph of fast %K and %D gives frequent buy and sell signals for trading of the share. The data given below in blue lines (series 1) represent %K and red line (series 2) %D line. Fig: 2008 data

In the data given is of the year 2008 where the arrows represent the buy and sell signal. To one from bottom represent the buy signal and other from top represent sell signal. In the similar manner there is slow %K and %D line obtained.

SLOW %K and %D:

It is considered to be a general rule that when %K is above 80 one should sell the share and when %K is below 20 one can buy the share so according to the graph on 12th September one can buy the Hero Honda share. In slow %K and %D the buy and sell signals are not so frequent.

RSI: Fig: RSI using F-charts

As we can see that on 17th October 2008 from the figure that RSI is very low that is 34.78 and is very much below 50 so it is not favorable to by the stock at this point of time when RSI is even below EMA(46.69). This means that share is over sold when compared but from the previous data we can see that it will still go much lower below this value so it is not right time to buy this share and still can be given some more time. All the points above 70 RSI tells over bought situations and all below 30 show over sold situation in this figure.

COMBINING VARIOUS FACTORS:

It seems that a buy signal is going to come soon (in 1or 2 days) seeing a combined aspect of various indicators of price, volume, MACD and RSI curves. As on 15th October RSI was 30 and on 17th October RSI is 37 and MACD was on zero on 15th. Apart from this volume were lower and prices are low. Keeping in mind various indicators one should have bought this share for trading purpose on 15th October.

PORTFOLIO: Now taking 3 companies in portfolio we have to make an effective port folio using the data. The three companies are Ultra tech , Airtel and Hero honda.

Maximum return of portfolio is 47% with Risk Sd = 8.28 With Ultratech weight = 0 Airtel Weight = 1 Hero honda weight = 0 Minimum Risk of Portfolio is 7.40% with return = 42.9% With Ultratech weight = 0.1 Airtel Weight = 0.6 Hero honda weight = 0.3 Weighage Ultratech

Airtel

Portfolio Return in %

Portfolio Risk (var)

Portfolio Risk (Sd)

Return

Hero Honda

Airtel

Ultratech

Hero Honda

0 0

0 0.1

1 0.9

0.27 0.27

0.42 0.42

0.31 0.31

31.27033 32.35838

88.21268 78.40301

9.392161 8.854547

0 0

0.2 0.3

0.8 0.7

0.27 0.27

0.42 0.42

0.31 0.31

33.44643 34.53449

70.33574 64.01088

8.386641 8.00068

0

0.4

0.6

0.27

0.42

0.31

35.62254

59.42841

7.708983

0 0 0

0.5 0.6 0.7

0.5 0.4 0.3

0.27 0.27 0.27

0.42 0.42 0.42

0.31 0.31 0.31

36.71059 37.79864 38.88669

56.58835 55.49069 56.13543

7.522523 7.449207 7.492358

0

0.8

0.2

0.27

0.42

0.31

39.97475

58.52257

7.650004

0 0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2

0.9 1 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 0 0.1 0.2 0.3 0.4 0.5 0.6

0.1 0 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.8 0.7 0.6 0.5 0.4 0.3 0.2

0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27

0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42

0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31

41.0628 42.15085 30.83858 31.92664 33.01469 34.10274 35.19079 36.27884 37.3669 38.45495 39.543 40.63105 30.40684 31.49489 32.58294 33.67099 34.75905 35.8471 36.93515

62.65211 68.52405 81.5677 72.75553 65.68576 60.35839 56.77342 54.93085 54.83069 56.47292 59.85756 64.98459 77.51223 69.69756 63.62528 59.2954 56.70793 55.86286 56.76019

7.915308 8.277925 9.031484 8.529685 8.104675 7.769066 7.534814 7.411535 7.404775 7.514847 7.736767 8.061302 8.804103 8.348506 7.976546 7.700351 7.530467 7.474146 7.533936

0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5 0.6 0.6 0.6 0.6 0.6 0.7 0.7 0.7

0.7 0.8 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0 0.1 0.2 0.3 0.4 0.5 0.6 0 0.1 0.2 0.3 0.4 0.5 0 0.1 0.2 0.3 0.4 0 0.1 0.2

0.1 0 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 0.6 0.5 0.4 0.3 0.2 0.1 0 0.5 0.4 0.3 0.2 0.1 0 0.4 0.3 0.2 0.1 0 0.3 0.2 0.1

0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27 0.27

0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42 0.42

0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31 0.31

38.0232 39.11125 29.97509 31.06314 32.15119 33.23925 34.3273 35.41535 36.5034 37.59145 29.54334 30.6314 31.71945 32.8075 33.89555 34.9836 36.07166 29.1116 30.19965 31.2877 32.37575 33.46381 34.55186 28.67985 29.7679 30.85595 31.94401 33.03206 28.2481 29.33616 30.42421

59.39992 63.78205 76.04626 69.22908 64.1543 60.82192 59.23195 59.38437 61.27919 64.91642 77.1698 71.35011 67.27283 64.93794 64.34546 65.49538 68.3877 80.88283 76.06064 72.98086 71.64347 72.04848 74.1959 87.18537 83.36068 81.27839 80.9385 82.34101 96.07742 93.25022 92.16542

7.707134 7.986367 8.720451 8.320402 8.009638 7.798841 7.696229 7.706125 7.828103 8.057073 8.784634 8.4469 8.202001 8.058408 8.021562 8.092922 8.269686 8.993488 8.721275 8.542883 8.464247 8.488138 8.613704 9.337311 9.130207 9.015453 8.996582 9.074195 9.801909 9.656615 9.600282

0.7

0.3

0

0.27

0.42

0.31

31.51226

92.82303

9.634471

0.8

0

0.2

0.27

0.42

0.31

27.81636

107.559

10.37106

0.8

0.1

0.1

0.27

0.42

0.31

28.90441

105.7293

10.28247

0.8

0.2

0

0.27

0.42

0.31

29.99246

105.642

10.27823

0.9 0.9 1

0 0.1 0

0.1 0 0

0.27 0.27 0.27

0.42 0.42 0.42

0.31 0.31 0.31

27.38461 28.47266 26.95286

121.63 120.7978 138.2906

11.0286 10.99081 11.7597

Variance -Covariance Matrix Ultratech Hero Honda Ultratech Hero Honda

Airtel

Airtel

138.29 44.98

44.98 68.52

48.51 34.81

48.51

34.81

88.21

Covariance Utech-hero Utec-Air Air-Hero H 6.43453753

Date

44.98449

0.477984481

Return w.r.t Close Price (%) Ultratech Airtel Hero H

Sep-04 Oct-04 Nov-04 Dec-04 Jan-05 Feb-05 Mar-05 Apr-05 May-05 Jun-05 Jul-05 Aug-05 Sep-05 Oct-05 Nov-05 Dec-05 Jan-06 Feb-06 Mar-06 Apr-06 May-06 Jun-06 Jul-06 Aug-06 Sep-06 Oct-06 Nov-06 Dec-06 Jan-07

0.244407 13.93473 -2.81481 15.27778 1.013811 8.290909 -4.75487 -5.96531 -2.54949 8.479532 8.029508 15.31188 6.206582 -14.6151 13.02273 -5.07778 21.39764 8.089866 22.11418 25.59719 -29.5702 23.86655 -3.71358 6.494945 15.88427 -1.19509 2.072686 22.05 -9.40833

4.469074008 7.665982204 10.33057851 24.22932872 6.841372913 -2.27914044 -8.10750777 0.145032632 8.158339368 8.390984155 16.57401688 11.42705758 10.47709621 -7.41750359 10.81667442 -3.31422179 2.863754701 1.602924634 14.26792139 -1.18687175 -10.2953793 1.106708567 3.472972973 7.352749118 14.07542579 13.0745441 18.87201735 -0.21421771 12.50695714

2.649727 -26.8376 3.528216 3.407976 3.29566 3.190512 3.091866 2.999136 2.911807 2.82942 2.751567 -25.1635 3.578314 3.454694 3.33933 3.231422 3.13027 3.035258 2.945844 2.861548 -23.3594 3.629854 3.502711 3.384173 3.273395 3.169641 3.072261 2.980686 -21.4094

Feb-07 Mar-07 Apr-07 May-07 Jun-07 Jul-07 Aug-07 Sep-07 Oct-07 Nov-07 Dec-07 Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08

Average Var (N) Var (N-1) Sd (N) Sd (N-1)

-10.325 -13.5394 6.470245 0.816774 8.833132 3.566469 -1.2498 13.26 -4.16287 -1.176 2.74 -15.17 5.897049 -14.4291 -2.41072 -14.5588 -16.2092 5.377627 2.812854 -4.20125

1.590106007 6.184347826 6.400681342 4.402438274 -1.39773531 8.074645613 -2.60667441 6.966700761 6.948576286 -6.67097159 5.865133855 -13.081293 -4.49418706 0.060562016 8.800387362 -2.48664887 -17.6621598 10.73927804 4.761308891 -6.22909699

3.682901 3.552081 3.430236 3.316473 3.210014 3.110177 -19.2951 3.737521 3.602863 3.477571 3.3607 3.251429 -16.9948 3.793785 3.655118 3.52623 3.406122 -14.4828 3.85177 3.708911

2.246072 138.2906 141.1716 11.7597 11.88157

3.919838166 68.52404998 69.95163436 8.277925464 8.363709366

-0.17599 75.30574 76.87461 8.677888 8.767817

SINGLE INDEX MODEL

Variables Entered/Removedb

Model 1

Variables

Variables

Entered

Removed

Method

market returna

. Enter

a. All requested variables entered. b. Dependent Variable: maruti return

Model Summary Change Statistics

Model 1

R .632a

R Square

Adjusted R

Std. Error of

R Square

Square

the Estimate

Change

.400

a. Predictors: (Constant), market return

.389

5.98903

.400

F Change 35.995

df1

df2 1

Sig. F Change 54

.000

ANOVAb Model 1

Sum of Squares

df

Mean Square

Regression

1291.084

1

1291.084

Residual

1936.900

54

35.869

Total

3227.984

55

F

Sig.

35.995

a

.000

a. Predictors: (Constant), market return b. Dependent Variable: hero honda return

Coefficientsa Standardized Unstandardized Coefficients Model 1

B (Constant) market return

Std. Error -1.303

.921

.880

.147

a. Dependent Variable: Hero Honda return

Coefficients Beta

95% Confidence Interval for B t

.632

Sig.

Lower Bound

Upper Bound

-1.414

.163

-3.150

.544

6.000

.000

.586

1.174

The independent variable can explain only 40% of the dependent variable. i.e only 40% of the Hero Honda return can be explained by the market return. And the remaining 60% is not explained. The value only gives the strength of association between the Hero Honda return and the market return. In the anova table we got a significance value of 0.000 which indicates that the independent variable can reliably predict the value of dependent variable.

RESULTS: Price Target Price Short sell Investment Period

Rs826 Rs875 Rs885-895 12 days

Stock Info Sector Market Cap Beta 52 WK Avg Daily Volume Face Value BSE Code NSE Code Reuters Code Bloomberg Code

Automobile (Rs cr) 16,495 0.4 High / Low 895/561 69681 (Rs) 2 500182 HEROHONDA HROH.BO HH IN