I

Summer Training internship Project

report on

Technical Analysis

Of

State Bank of India

Submitted in partial fulfillment of therequirements for Master of BusinessAdministration (MBA)

SUBMITTED TO: SUBMITTED BY

Dr. B.S SHARMA KAMAL YADAV

(08320803912)

(Academic year 2012-2014)

BHAGWAN PARSHURAM INSTITUE OF TECHNOLOGY

(Affiliated to GURU GOBIND SINGH INDRAPRASTHA UNIVERSITY,

Delhi)

II

BHAGWAN PARSHURAM INSTITUTE OF TECHNOLOGYROHINI, SECTOR-17, DELHI

SEPTEMBER, 2013

Declaration

I, Kamal Yadav, Roll No 08320803912, a full time

bonafide student of III Semester of Master of

Business Administration (MBA) Programme of Bhagwan

Parshuram Institute of Technology, Delhi. I hereby

certify that this project work carried out by me at

SMART EQUITY BROKERS PVT. LTD. the report submitted

in partial fulfillment of the requirements of the

programme is an original work of mine under the

guidance of the industry mentor Mr. Amit Jain (Smart

Equity Pvt. Ltd.) and faculty mentor Dr. B.S. Sharma

and is not based or reproduced from any existing work

of any other person or on any earlier work undertaken

at any other time or for any other purpose, and has

not been submitted anywhere else at any time.

III

(Student's Signature)

Date:

(Faculty Mentor's Signature)

Date:

II

AcknowledgmentI have taken efforts in this project.

However, it would not have been possible

without the kind support and help of many

individuals and organizations. I would like

to extend my sincere thanks to all of them.

I am highly indebted to Mr. Amit Jain for

their guidance and constant supervision as

well as for providing necessary information

regarding the project & also for their

support in completing the project.

I would like to express my gratitude

towards the members of Smart Equity

Brokers Pvt. Ltd for their kind co-

operation and encouragement which help me

in completion of this project.

KAMAL YADAV Signature:

Date:

III

Executive SummaryI joined Smart Equity brokers Pvt. Ltd. as

I have my interest towards the share and

securities Market. Smart Equity Brokers

Pvt. Ltd. is a well established institution

in the Indian market. The Objective of my

study was to see how many people are

interested in the share Market. I also

wanted to know the growth potential of this

industry

During my internship I get to know the way

the operations are done in Smart Equity

Brokers Pvt. Ltd... There are number of

clients who are associated with the company

IV

and lot of them follows the markets

carefully and closely. Few of them do the

dealings regularly. Executive officers of

the company are in close touch with the

clients.

I also came across to some problems being

faced by the clients. Sometimes the

Executives are too busy attending

particular clients that they overlook the

other client.

CONTENTSCHAPTER-1...............................................1INTRODUCTION:-..........................................2

WHAT’S THIS EQUITY ANALYSIS?.........................2Assumption’s for the Equity Analysis.............3

Technical analysis:-.................................5DOW THEORY:-.....................................6Criticism of Dow Theory..........................8

Candlestick Charting.................................8History of Technical Analysis:.......................9

CHAPTER-2..............................................13COMPANY PROFILE........................................14

V

Objectives of the Study...............................18CHAPTER-3..............................................19RESEARCH METHODOLOGY...................................19

Tools & Instruments Are Used To Do The Technical Analysis:...........................................19

Price Fields....................................20Price Styles (Charts Types).....................21

The Use of Trends...................................33A More Formal Definition........................35Types of Trend..................................36Trend Lengths...................................37Trend Lines.....................................38

The Importance of Trend.............................40What Is Volume?.....................................41

Volume and Chart Patterns.......................42CHART PATTERNS:-................................43

SUPPORT AND RESISTANCE:-............................51The Importance of Support and Resistance........54

MOVING AVERAGES:-...................................55Types of Moving Averages: -.....................56

Technical Indicators................................63BOLLINGER BANDS.................................63MACD............................................64MOMENTUM........................................66VOLUME..........................................66Relative Strength Index.........................70

CHAPTER-4..............................................74DATA ANALYSIS........................................74

TECHNICAL ANALYSIS OF SBI...........................75CHAPTER-5..............................................85

FINDINGS:...........................................86CONCLUSION:............................................87BIBLIOGRAPHY:..........................................89

1

CHAPTER-1 INTRODUCTION

2

INTRODUCTION:-

WHAT’S THIS EQUITY ANALYSIS? Professional investor will make more money & less

loss than, who let their heart rule. Their head

eliminate all emotions for decision making. Be

ruthless & calculating, you are out to make

money. Decision should be based on actual

movement of share price measured both in money &

percentage term & nothing else. Greed must be

avoided.

Patience may be a virtue, but impatience can

frequently be profitable.

In Equity Analysis anticipated growth,

calculations are based on considered FACTS & not

on HOPE. Equity analysis is basically a

combination of two independent analyses, namely

fundamental analysis & Technical analysis. The

3

subject of Equity analysis, i.e. the attempt to

determine future share price movement & its

reliability by references to historical data is a

vast one, covering many aspect from the

calculating various FINANCIAL RATIOS, plotting of

CHARTS to extremely sophisticated indicators.

A general investor can apply the principles by

using the simplest of tools: pocket calculator,

pencil, ruler, chart paper & your cautious mind,

watchful attention. It should be pointed out

that, this equity analysis does not discuss how

to buy & sell shares, but does discuss a method

which enables the investor to arrive at buying &

selling decision. The financial analysts always

need yardsticks to evaluate the efficiency &

performances of any business unit at the time of

investment. Fundamental analysis is useful in

long term investment decision. In Fundamental

analysis a company’s goodwill, its performances,

liquidity, leverage,

4

turnover, profitability & financial health was

checked & analysis with the help of ratio

analysis for the purpose of long term successful

investment.

Technical analysis refers to the study of market

generated data like prices & volume to determine

the future direction of prices movements.

Technical analysis mainly seeks to predict the

short term price travels. The focus of technical

analysis is mainly on the internal market data,

i.e. prices & volume data. It appeals mainly to

short term traders.

It is the oldest approach to equity

investment dating back to the late 19th century.

Assumption’s for the Equity Analysis.

1. Works only in normal share-market conditions

with great reliability, it also works in abnormal

share-market conditions, but with low

reliability.

2. Equity analysis is purely based on the

INVESTMENT PHILOSOPHY, so the investment object

has vital importance associated to return along

5

with risk.

3. Cash management gets the magnitude role,

because the scenario of equity analysis is

revolving around the term money

4. Portfolio management, risk management was up

to the investor s knowledge.

5. Capital market trend is always a friend,

whether it is short run or long run.

6. You are buying stock & not companies, so don t

are curious or panic to do Post-mortem of

companies’ performances

7. History repeats: investors & speculators react

the same way to the same types of events

homogeneously.

8. Capital market has a typical market psychology

along with other issues like; perceptions, the

crowd Vs the individual, tradition s & trust.

9. An individual perceptions about the investment

return & associated risk may differ from

individual to individual.

10. Although the equity analysis is art as well

as sciences so, it also has some Exceptions.

6

EQUITY ANALYSIS

FUNDAMENTAL

TECHNICAL

ANALYSIS

ANALYSIS

7

Technical analysis:-“Technical analysis refers to the study of market generated

data like prices & volume to determine the future direction of

prices movements.”

Technical analysis mainly seeks to predict

the short term price travels. It is important

criteria for selecting the company to invest. It

also provides the base for decision-making in

investment. The one of the most frequently used

yardstick to check & analyze underlying price

progress. For that matter a verity of tools was

consider.

This Technical analysis is helpful to general

investor in many ways. It provides important &

vital information regarding the current price

position of the company.

Technical analysis involves the use of

various methods for charting, calculating &

interpreting graph & chart to assess the

performances & status of the price. It is the

8

tool of financial analysis, which not only

studies but also reflecting the numerical &

graphical relationship between the important

financial factors.

The focus of technical analysis is mainly on

the internal market data, i.e. prices & volume

data. It appeals mainly to short term traders. It

is the oldest approach to equity investment

dating back to the late 19th century.

It uses charts and computer programs to study

the stock’s trading volume and price movements in

the hope of identifying a trend.

In fact the decision made on the basis of

technical analysis is done only

After inferring a trend and judging the future

movement of the stock on

the basis of the trend. Technical Analysis

assumes that the market is efficient and the

price has already taken into consideration the

other factors related to the company and the

industry. It is because of this assumption that

many think technical analysis is a tool, which is

effective for short-term investing.

9

DOW THEORY:-• Charles Dow who was editor of Wall

Street Journal in 1900 is known for the

most important theory developed by him

with technical indicators. In fact,

the theory gained so much significance

that the theory was named after him.

• The Dow Theory has been further

developed by other technical analysts

and it forms the basis of the

technician’s theory.

• The theory predicts trends in the

market for individual and total

existing securities. It also shows

reversals in stock prices.

• According to ‘Dow theory’, the market

always has three movements and the

10

movements are simultaneous in the

nature. These movements may be

described as:-

• The narrow movement which occurs from

day to day.

• The short swing which usually moves for

short time like two weeks and extends

up to a month; this movement can be

called a short term movement, and

The third movement is also the main

movement and it covers for years in its

duration.

• According to the type of movements,

they have been given special names.

• The narrow movement is called

‘fluctuations’ the short swing is

better known as ‘secondary movements’

and the main movement is also called

the ‘primary trends’.

• Narrow movements are called

11

‘fluctuations’. Secondary movements

are those which last only for a short

while and they are also known as

“corrections”. Primary trends are,

therefore, the main movement in the

stock market. It is also called

‘Bears” and ‘Bulls” market.

• According to the Dow Theory, the price

movements in a market can be identified

by means of a line-chart.

• In this chart the technical analyst

should plot the price of the share.

With it, he should also mark the market

average every day.

• This would help in identifying the

primary and secondary movements.

• Dow theorists believe in ‘momentum’,

which, according to them, keeps the

price moving in the same direction.

• They believe in primary trends, which

according to them are momentum or bear

12

and bull markets. The momentum will

carry the prices further but momentum

of primary trend will be halted by the

terminology used by technical analysts

called ‘support areas’ and ‘resistance

areas’.

Criticism of Dow Theory

• The Dow Theory is subject to various

limitations in actual practice.

• Dow has developed this theory to

depict the general trend of the market

but not with the intention of

projecting the future trend or to

diagnose the buy and sell signals in

the market.

• These applications of the Dow Theory

have come in the light of analytical

studies of financial analysts.

• This theory is criticized on the ground

13

that it is too subjective and based on

historical interpretation; it is not

infallible as it depends on the

interpretative ability of the analyst.

• The results of this theory do not also

give meaningful and conclusive evidence

of any action to be taken in terms of

buy and sell operations.

Candlestick Charting

• The candle is comprised of two parts,

the body and the shadows. The body

encompasses the open and closing price

for the period. The candle body is

black if the security closed below the

open, and white if the close was higher

than the open for the period. The

candlestick shadow encompasses the

intra period high and low.

History of Technical Analysis:Technical Analysis as a tool of investment

for the average investor thrived in the late

14

nineteenth century when Charles Dow, then editor

of the Wall Street Journal, proposed the Dow

Theory. He recognized that the movement is caused

by the action/reaction of the people dealing in

stocks rather than the news in itself.

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

15

data and what information this data can provide

about where the Security might move in the

future.

Basic premises of technical analysis:1. Market prices are determined by the

interaction of supply & demand forces.

2. Supply & demand are influenced by variety of

supply & demand affiliated Factors both rational

& irrational.

3. These include fundamental factors as well as

psychological factors.

4. Barring minor deviations stock prices tend to

move in fairly persistent trends.

5. Shifts in demand & supply bring about change

in trends.

6. This shift s can be detected with the help of

charts of manual & computerized action, because

of the persistence of trends & patterns analysis

of past market data can be used to predict future

prices behaviours.

Drawbacks / limitations of technical

analysis:1. Technical analysis does not able to explain

16

the rezones behind the employment or selection of

specific tool of Technical analysis.

2. The technical analysis failed to signal an

uptrend or downtrend in time.

3. The technical analysis must be a self

defeating proposition. As more & more people use,

employ it the value of such analysis trends to

reduce.

Why we use TECHNICAL ANALYSIS?1)Technical analysis provides information on

the best entry and

Exit points for a trade.

2)On a chart, the trader can see where momentum

is rising, a

Trend is forming, a price is dipping or other

events are developing that show the best entry

point and time for the most profitable trade.

With the constant movement of various currencies

against each other in the Forex market, most

Traders will focus on using technical indicators

to find and place their Trades.

IS TECHNICAL ANALYSIS DIFFICULT?

17

1) Technical analysis is not difficult, but it

requires studying

Different types of charts such as the hourly

or daily charts, knowing which

technical indicators to use and how to use

them.

2) Computers and the Internet have made this

process much easier.

Most brokers provide basic charts and technical

indicators for free or at a very low cost.

3) One way to avoid getting frustrated by all the

lines, colours, and

Graphics is to focus on using only a few

indicators that will

Provide you with the information needed. Try

not to clutter your

Chart with too much information.

Fundamental vs. Technical AnalysisTechnical 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

18

price movements. Fundamental analysis, on the

other hand, looks at economic factors, known as

fundamentals.

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 future can be found in the pastIf prices are based on investor expectations,

then knowing what a security should sell for

(i.e., fundamental analysis) becomes less

important than knowing what other investors

expect it to sell for. That's not to say that

knowing what a security should sell for isn't

important--it is. But there is usually a fairly

strong consensus of a stock's future earnings

that the average investor cannot disprove.

Technical analysis is the process of

analyzing a security's historical prices in an

effort to determine probable future prices. This

19

is done by comparing current price action (i.e.,

current expectations) with comparable historical

price action to predict a reasonable outcome. The

devout technician might define this process as

the fact that history repeats itself while others

would suffice to say that we should learn from

the past.

20

CHAPTER-2 COMPANY PROFILE

21

COMPANY PROFILE

About Smart Equity Broker Pvt Ltd:

Smart Group was incorporated in 2006 and promoted by Mr.

Arun Khera and his family members. The group is primarily

in to retail broking (including HNIs) - Equity, currency

futures and commodity segments. In the retail broking

segment, the Group operates through two companies - Smart

22

Equity Brokers (P) Ltd. and Smart Commodity Brokers Pvt

Ltd. Smart Group follows franchisee-based model and has

around 30-35 franchisee spread across Delhi/NCR And

having client base of around 6500-7000; out of which

2000-2200 are active.

. The promoters directly hold 79% stake in the company

while remaining 21% is held by the group company - Smart

Commodity Brokers. The company is engaged in the business

of equity and currency futures broking and is a member of

NSE & BSE (Equity, Debt and Derivatives) and a depository

participant of NSDL. During FY2012, Smart Equity booked a

net profit of Rs.0.61 crore on operating income of

Rs.2.02 crore as compared to a net profit of Rs.1.02

crore on operating income of Rs.2.63 cr. for the previous

financial year. The company reported net worth of Rs.15.73

crore on Mar-12.

. The company is engaged in the business of commodity

broking and is a member of commodity exchanges - NCDEX

(National Commodity & Derivative Exchange Limited) and

MCX (Multi Commodity Exchange of India Limited). During

FY2012, Smart Commodity Broking booked a net profit of

Rs.0.74 crore on operating income of Rs.2.75 crore as

compared to a net profit of Rs.0.32 crore on operating

income of Rs. 1.06 cr. for the previous financial year.

The company reported a net worth of Rs.5.57 crore as on

Mar-12. ICRA has assigned long-term rating of [ICRA]BB

(pronounced ICRA double B) and short-term rating of

[ICRA]A4 (pronounced ICRA A four) to Rs. 43 crore non-

23

fund based bank lines of Smart Equity Brokers (P) Ltd†.

The outlook on the long-term rating is 'stable'.

The rating considers the combined financials and business

profile of Smart group companies, which are involved

mainly in equity and commodity broking and other related

activities. The rating is constrained by the inherent

volatility in group's prime business of broking which is

prone to cyclical downturns, shrinking broking yields,

high dependence on trading income, moderate levels of

profitability and relatively smaller presence with

declining market share. The rating takes note of the

group's adequate experience in equity and commodity

broking business, moderate capitalization & liquidity

level and reasonable risk management systems deployed by

the company in its broking operations. The ratings at the

current level also reflect Smart Group's relative

positioning with other ICRA rated brokerage houses.

Incorporated in 2006 by first generation entrepreneurs,

Smart group started its capital market retail business

operations focusing on retail equity and commodity

broking. The equity broking business is done in Smart

Equity Brokers (P) Ltd. (Smart Equity) while the

commodity broking is done through Smart Commodity Brokers

Pvt Ltd (Smart Commodity). Smart Group continues to

remain primarily a retail broking player with no presence

in the institutional equity broking segment. The group

also carries out Depository, E-broking and arbitrage

24

trading operations.

Smart Equity has a small presence in retail equity

broking segment with a market share of 0.05% in FY-12 as

compared to 0.08% in FY-11. The company is also involved

in currency future broking segment; however the scale of

operations in this segment remains marginal. The income

stream of Smart Equity is concentrated to broking and

trading activities while fee-based income is negligible.

Going forward, Smart Equity's financial performance would

remain highly sensitive to the vagaries of the domestic

capital markets and is subject to risks associated with

capital market operations.

Smart Equity deploys extra cash available into the

arbitrage opportunities that may exist in the equity

capital market. The income from trading activities

(proprietary and arbitrage) constitute 36% of total

income of the company in FY-12 as compared to 47% in the

previous financial year. Smart Group has put in a

reasonable risk management systems with constant

monitoring of dealer's positions to avoid any significant

losses.

Smart Equity has taken adequate steps to mitigate the

credit risks and market risks associated with the retail

broking business for the current scale of its business.

It collects adequate safety deposit from franchisee and

clients to meet any shortfall in the margin requirement.

25

So far, the company has able to protect its asset quality

as reflected in low level of debtors (at Rs.0.19 crore on

March 30, 2012, representing 0.9% of net worth); however,

in the absence of automated/stringent risk management

systems and processes, its asset quality could come under

pressure during the volatile capital market and thus

needs improvement.

Long-term and short-term bank lines are

subject to total utilization of Rs.43 crore

Smart Equity's liquidity profile is adequate; on an

average the utilization levels of bank limits given to

exchanges remain at about 70% which provides some cushion

to manage liquidity in times of volatility. While the

liquidity risk in broking activities is low, going

forward, Smart Equity's ratings would be sensitive to

its ability to improve upon its profitability by growing

its business volume and its ability to maintain superior

asset quality through volatile market conditions.

Company’s values

To be fair, empathetic and responsive in serving our

customers. To respect and reinforce our fellow employees

and the power of teamwork. To strive relentlessly to

improve what we do and how we do it.

Company’s customer base is a mix of institutional, high

net worth, and retail investors. This diversified base

of customers, together with our wide gamut of services,

provides us with the necessary stability and strength

26

to weather the volatility much better than that of the

competitors and also maintain high standards of

customer service levels throughout. Smart meets the

support needs of this investor base through

execution skills driven by an experienced sales

team and research-backed advice generated by a

team of experienced analysts. Smart advisory

services range from investing, trading, research,

financial planning and portfolio management,

which are offered, to a large number of high net

worth individuals and corporate

Business Operations

Smart Equity Brokers Pvt Ltd (Smart Equity) a financial

firm based in Delhi was incorporated in 2006. The

company attained membership in NSE and BSE in 2006. It

operates in both in cash and derivative market segments

of

BSE and NSE. Smart Equity offers comprehensive

financial service such as trading in equities and

derivatives, currency futures, online trading, margin

funding, research reports, advisory service and

distribution of financial products like mutual fund,

IPO and insurance among others. These services are

mainly catered to retail investors, proprietary HNI,

corporate and arbitrage clients. The company through

its associates, smart Commodity Brokers Pvt Ltd offers

commodity trading service which is member of MCX and

NCDEX.As on Mar 31,2011 the Company operated with 130

27

terminal across 40 Offices with 70 employees. During

the same period, the company had nearly 6,500 client

accounts. In FY11, Smart Equity generated 60% revenues

form the derivative market

Objectives of the Study

To give the practical knowledge of technical Analysis.

To Know how technical tools are used to predict the

future behaviour of stocks.

To know how charting techniques are useful to take buy

and sell decision.

To know how an investor can take rational investment

decisions by the study of market trends of movements.

To provide investor with technique with which they can

make a decent profit by trading in stock market.

To find out which equity share is preferable for the

investors i.e., when to buy & when to sell a

particular stock.

28

CHAPTER-3 RESEARCH METHODOLOGY

29

RESEARCH METHODOLOGY

Tools & Instruments Are Used To Do The

Technical Analysis:Price FieldsTechnical analysis is based almost entirely on the

analysis of price and volume. The fields which define a

security's price and volume are explained below.

Open - This is the price of the first trade for the

period (e.g., the first trade of the day). When analyzing

daily data, the Open is especially important as it is the

consensus price after all interested parties were able to

"sleep on it."

High - This is the highest price that the security

traded during the period. It is the point at which there

were more sellers than buyers (i.e., there are always

sellers willing to sell at higher prices, but the High

represents the highest price buyers were willing to pay).

Low - This is the lowest price that the security tradedduring the period. It is the point at which there were

more buyers than sellers (i.e., there are always buyers

willing to buy at lower prices, but the Low represents

the lowest price sellers were willing to accept).

Close - This is the last price that the security traded

30

during the period. Due to its availability, the Close is

the most often used price for analysis. The relationship

between the Open (the first price) and the Close (the

last price) are considered significant by most

technicians. This relationship is emphasized in

candlestick charts.

Volume - This is the number of shares (or contracts)that were traded during the period. The relationship

between prices and volume (e.g., increasing prices

accompanied with increasing volume) is important.

Open Interest - This is the total number of outstandingcontracts (i.e., those that have not been exercised,

closed, or expired) of a future or option. Open interest

is often used as an indicator.

Bid - This is the price a market maker is

willing to pay for a security (i.e., the price

you will receive if you sell).

Ask - This is the price a market maker is

willing to accept (i.e., the price you will pay

to buy the security).

Price Styles (Charts Types)Price in a chart can be displayed in four styles:

1.Bar Chart.

31

2. Line Chart.

3. Candlestick Chart.

4.Point and Figure Charts

1) Bar Charts :The highs and lows of a foreign currency are

plotted in a diagram and the points are joined

with vertical lines (bars). A small horizontal

tick to the left denotes the opening level while

a small horizontal tick to the right represents

the closing price of each interval.

2) Line Chart:

32

It gives the detailed information about every

aspect.

The exchange rates for each time period are

plotted in a diagram and the points are joined.

Prices on the y-axis, time on the x-axis.

The line chart chooses for example the closing

price of consecutive time periods, but can also

work with daily, official fixings.

The relatively easy handling of line charts is a

great advantage. Line charts do not show price

movements within a time period. This can be a

problem because important information for

33

exchange rate analysis can be lost. This Problem

was remedied with the development of bar charts

that represent a more sophisticated form of line

chart.

3) Candlestick Chart:

A candlestick is black if the closing price is

lower than the opening price. A candlestick is

white if the closing price is higher than the

opening price.

34

In the 1600s, the Japanese developed a method of

technical analysis to analyze the price of rice

contracts. This technique is called candlestick

charting. Steven Nison is credited with

popularizing candlestick charting

and has become recognized as the leading expert

on their interpretation.

Candlestick charts display the open, high, low,

and closing prices in a format similar to a

modern-day bar chart, but in a manner that

extenuates the relationship between the opening

35

and closing prices. Candlestick

Charts are simply a new way of looking at prices,

they don't involve any calculations. Because

candlesticks display the relationship between the

open, high, low, and closing prices, they cannot

be displayed on securities that only have closing

prices, nor were they intended to be displayed on

securities that lack opening prices.

The interpretation of candlestick charts is based

primarily on patterns. The most popular patterns

are explained below.

Bullish Patterns1)Long white (empty) line. This is a bullish

line. It occurs when prices open near the

low and close significantly higher near the

period's high.

2)Hammer. This is a bullish line if it occurs

after a significant downtrend. If the line

occurs after a significant up-trend, it is

called a Hanging Man. A Hammer is identified

36

by a small real body (i.e., a small range

between the open and closing prices) and a

long lower shadow (i.e., the low is

significantly lower than the open, high, and

lose). The body can be empty or filled-in.

3)Piercing line. This is a bullish pattern and

the opposite of a dark cloud cover. The

first line is a long black line and the

second line is a long white line. The second

line opens lower than the first line's low,

but it closes more than halfway above the

first line's real body.

4)Bullish engulfing lines. This pattern is

strongly bullish if it occurs after a

37

significant downtrend (i.e., it acts as a

reversal pattern). It occurs when a small

bearish (filled-in) line is engulfed by a

large bullish (empty) line.

5)Morning star. This 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.

6)Bullish doji star. A "star" indicates a

reversal and a doji indicates indecision.

Thus, this pattern usually indicates a

reversal following an indecisive period. You

should wait for a confirmation (e.g., as in

the morning star, above) before trading a

doji star. The first line can be empty or

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filled in.

Bearish Patterns1)Long black (filled-in) line. This is a

bearish line. It occurs when prices open near

the high and close significantly lower near

the period's low.

2)Hanging Man. These lines are bearish if they

occur after a significant uptrend. If this

pattern occurs after a significant downtrend,

it is called a Hammer. They are identified by

small real bodies (i.e., a small range

between the open and closing prices) and a

long lower shadow (i.e., the low was

significantly lower than the open, high, and

close). The bodies can be empty or filled-in.

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3)Dark cloud cover. This is a bearish pattern.

The pattern is more significant if the second

line's body is below the centre of the

previous line's body (as illustrated).

4)Bearish engulfing lines. This pattern is

strongly bearish if it occurs after a

significant uptrend (i.e., it acts as a

reversal pattern). It occurs when a small

bullish (empty) line is engulfed by a large

bearish (filled-in) line.

5) Evening star. This is a bearish pattern

signifying a potential top. The "star" indicates

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a possible reversal and the bearish (filled-in)

line confirms this. The star can be empty or

filled in.

6) Doji star. A star indicates a reversal and a

doji indicates indecision. Thus, this pattern

usually indicates a reversal following an

indecisive period. You should wait for a

confirmation (e.g., as in the evening star

illustration) before trading a doji star.

7) Shooting star. This pattern suggests a minor

reversal when it appears after a rally. The

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star's body must appear near the low price and

the line should have a long upper shadow.

Reversal Patterns1) Long-legged doji. This 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.

2) Dragon-fly doji. This line also signifies a

turning point. It occurs when the open and

close are the same, and the low is

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significantly lower than the open, high, and

closing prices.

3) Gravestone doji. This 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.

4) Star. 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.

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5) Doji star. A star indicates a reversal and a

doji indicates indecision. Thus, this pattern

usually indicates a reversal following an

indecisive period. You should wait for a

confirmation (e.g., as in the evening star

illustration) before trading a doji star.

Neutral Patterns

1)Spinning tops. These are neutral lines.

They occur when the distance between the

high and low, and the distance between the

open and close, are relatively small.

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2)Doji. This line implies indecision. The

security opened and closed at the same

price. These lines can appear in several

different patterns. Double doji lines (two

adjacent doji lines) imply that a forceful

move will follow a breakout from the

current indecision.

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3) Point And Figure Charts

The point and figure chart is not well

known or used by the average investor but it has

had a long history of use dating back to the

first technical traders. This type of chart

reflects price movements and is not as concerned

about time and volume in the formulation of the

points. The point and figure chart removes the

noise, or insignificant price movements, in the

stock, which can distort traders' views of the

price trends. These types of charts also try to

neutralize the skewing effect that time has on

chart analysis.

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When first looking at a point and figure chart,

you will notice a series of Xs and Os. The Xs

represent upward price trends and the Os

represent downward price trends. There are also

numbers and letters in the chart; these represent

months, and give investors an idea of the date.

Each box on the chart represents the price scale,

which adjusts depending on the price of the

stock: the higher the stock's price the more each

box represents. On most charts where the price is

between $20 and $100, a box represents $1, or 1

point for the stock. The other critical point of

a point and figure chart is the reversal

criteria. This is usually set at three but it can

also be set according to the chartist's

discretion. The reversal criteria set how much

the price has to move away from the high or low

in the price trend to create a new trend or, in

other words, how much the price has to move in

order for a column of Xs to become a column of

Os, or vice versa. When the price trend has moved

47

from one trend to another, it shifts to the

right, signalling a trend change.

Summary of charts

TRENDS IN TECHNICAL ANALYSISThe Use of Trends

One of the most important concepts in

technical analysis is that of trend. The

meaning in finance isn't all that

different from the general definition of the

term - a trend is really nothing more than

the general direction in which a security or

market is headed. Take a look at the chart

below:

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Is not it hard to see that the trend is up?

However, it's not always this easy to see a

trend:

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There are lots of ups and downs in this

chart, but there isn't a clear indication of

which direction this security is headed.

A More Formal Definition

Unfortunately, trends are not always

easy to see. In other words, defining a

trend goes well beyond the obvious. In any

given chart, you will probably notice that

prices do not tend to move in a straight

line in any direction, but rather in a

series of highs and lows. In technical

analysis, it is the movement of the highs

and lows that constitutes a trend. For

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example, an uptrend is classified as a

series of higher highs and higher lows,

while a downtrend is one of lower lows and

lower highs.

 It is an example of an uptrend. Point 2 in the

chart is the first high, which is determined

after the price falls from this point. Point 3 is

the low that is established as the price falls

from the high. For this to remain an uptrend each

successive low must not fall below the previous

lowest point or the trend is deemed a reversal.

Types of Trend There are three types of trend:

1. Uptrend

2. Downtrend

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3. Sideways/Horizontal Trends

As the names imply, when each successive

peak and trough is higher, it's referred to as an

upward trend. If the peaks and troughs are

getting lower, it's a downtrend. When there is

little movement up or down in the peaks and

troughs, it's a sideways or horizontal trend. If

you want to get really technical, you might even

say that a sideways trend is actually not a trend

on its own, but a lack of a well-defined trend in

either direction. In any case, the market can

really only trend in these three ways: up, down

or nowhere

Trend Lengths

Along with these three trend directions, there are

three trend classifications. A trend of any

direction can be classified as a long-term trend,

intermediate trend or a short-term trend. In terms

of the stock market, a major trend is generally

categorized as one lasting longer than a year. An

intermediate trend is considered to last between one

and three months and a near-term trend is anything

less than a month. A long-term trend is composed of

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several intermediate trends, which often move

against the direction of the major trend. If the

major trend is upward and there is a downward

correction in price movement followed by a

continuation of the uptrend, the correction is

considered to be an intermediate trend. The short-

term trends are components of both major and

intermediate trends. Take a look a Figure 4 to get a

sense of how these three trend lengths might look.

When analyzing trends, it is important that

the chart is constructed to best reflect the

type of trend being analyzed. To help

identify long-term trends, weekly charts or

daily charts spanning a five-year period are

used by chartists to get a better idea of

the long-term trend. Daily data charts are

53

best used when analyzing both intermediate

and short-term trends. It is also important

to remember that the longer the trend, the

more important it is; for example, a one-

month trend is not as significant as a five-

year trend.

Trend Lines

A trend line is a simple charting technique

that adds a line to a chart to represent the trend

in the market or a stock. Drawing a trend line is as

simple as drawing a straight line that follows a

general trend. These lines are used to clearly show

the trend and are also used in the identification of

trend reversals.

An upward trend line is drawn at the lows

of an upward trend. This line represents the support

the stock has every time it moves from a high to a

low. Notice how the price is propped up by this

support. This type of trend line helps traders to

anticipate the point at which a stock's price will

begin moving upwards again. Similarly, a downward

trend line is drawn at the highs of the downward

trend. This line represents the resistance level

that a stock faces every time the price moves from a

low to a high.

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Channels

A channel, or channel lines, is the

addition of two parallel trend lines that

act as strong areas of support and

resistance. The upper trend line connects a

series of highs, while the lower trend line

connects a series of lows. A channel can

slope upward, downward or sideways but,

regardless of the direction, the

interpretation remains the same. Traders

will expect a given security to trade

between the two levels of support and

resistance until it breaks beyond one of the

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levels, in which case traders can expect a

sharp move in the direction of the break.

Along with clearly displaying the trend,

channels are mainly used to illustrate

important areas of support and resistance.

A descending channel on a stock chart; the

upper trend line has been placed on the

highs and the lower trend line is on the

lows. The price has bounced off of these

lines several times, and has remained range-

bound for several months. As long as the

price does not fall below the lower line or

move beyond the upper resistance, the range-

bound downtrend is expected to continue.

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The Importance of Trend

It is important to be able to

understand and identify trends so that you can

trade with rather than against them. Two

important sayings in technical analysis are "the

trend is your friend" and "don't buck the trend,"

illustrating how important trend analysis is for

technical traders

What Is Volume?

Volume is simply the number ofshares or contracts that trade over a given

period of time, usually a day. The higher

the volume the more active the security. To

determine the movement of the volume (up or

down), chartists look at the volume bars

that can usually be found at the bottom of

any chart. Volume bars illustrate how many

shares have traded per period and show

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trends in the same way that prices do.

Why Volume Is Important?

Volume is an important aspectof technical analysis because it is used to

confirm trends and chart patterns. Any price

movement up or down with relatively high

volume is seen as a stronger, more relevant

move than a similar move with weak volume.

Say, for example, that a stock jumps 5% in

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one trading day after being in a long

downtrend. Is this a sign of a trend

reversal? This is where volume helps

traders. If volume is high during the day

relative to the average daily volume, it is

a sign that the reversal is probably for

real. On the other hand, if the volume

is below average, there may not be enough

conviction to support a true trend reversal.

Volume should move with the trend. If prices

are moving in an upward trend, volume should

increase (and vice versa). If the previous

relationship between volume and price

movements starts to deteriorate, it is

usually a sign of weakness in the trend. For

example, if the stock is in an uptrend but

the up trading days are marked with lower

volume, it is a sign that the trend is

starting to lose its legs and may soon end.

When volume tells a different story, it is a

case of divergence, which refers to a

contradiction between two different

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indicators. The simplest example of

divergence is a clear upward trend on

declining volume.

Volume and Chart Patterns

The other use of volume is toconfirm chart patterns. Patterns such as

head and shoulders, triangles, flags and

other price patterns can be confirmed with

volume, a process which we'll describe in

more detail later in this tutorial. In most

chart patterns, there are several pivotal

points that are vital to what the chart is

able to convey to chartists. Basically, if

the volume is not there to confirm the

pivotal moments of a chart pattern, the

quality of the signal formed by the pattern

is weakened.

Volume Precedes Price

Another important idea in technicalanalysis is that price is preceded by volume.

Volume is closely monitored by technicians and

60

chartists to form ideas on upcoming trend

reversals. If volume is starting to decrease in

an uptrend, it is usually a sign that the upward

run is about to end. Now that we have a better

understanding of some of the important factors of

technical analysis, we can move on to charts,

which help to identify trading opportunities in

prices movements.

CHART PATTERNS:-

A chart pattern is a distinct formation on a

stock chart that creates a trading signal, or a

sign of future price movements. Chartists use

these patterns to identify current trends and

trend reversals and to trigger buy and sell

signals.

In the first section of this

tutorial, we talked about the three assumptions

of technical analysis, the third of which was

that in technical analysis, history repeats

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itself. The theory behind chart patterns is based

on this assumption. The idea is that certain

patterns are seen many times, and that these

patterns signal a certain high probability move

in a stock. Based on the historic trend of a

chart pattern setting up a certain price

movement, chartists look for these Patterns to

identify trading opportunities. While there are

general ideas and components to every chart

pattern, there is no chart pattern that will tell

you with 100% certainty where a security is

headed. This creates some leeway and debate as to

what a good pattern looks like, and is a major

reason why charting is often seen as more of an

art than a science. There are two types of

patterns within this area of technical

analysis, reversal and continuation. A reversal

pattern signals that a prior trend will reverse

upon completion of the pattern. A continuation

pattern, on the other hand, signals that a trend

will continue once the pattern is complete. These

patterns can be found over charts of any

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timeframe. In this section, we will review some

of the more popular chart patterns.

1. Head and Shoulders:

This is one of the most popular and

reliable chart patterns in technical analysis.

Head and shoulders is a reversal chart pattern

that when formed, signals that the security is

likely to move against the previous trend. As you

can see, there are two versions of the head and

shoulders chart pattern. Head and shoulders top

(shown on the left) is a chart pattern that is

formed at the high of an upward movement and

signals that the upward trend is about to end.

Head and shoulders bottom, also known as inverse

head and shoulders (shown on the right) is the

lesser known of the two, but is used to signal a

reversal in a downtrend.

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Both of these head and shoulders patterns are

similar in that there are four main parts: two

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shoulders, a head and a neckline. Also, each

individual head and shoulder is comprised of a

high and a low. For example, in the head and

shoulders top image shown on the left side, the

left shoulder is made up of a high followed by a

low. In this pattern, the neckline is a level of

support or resistance. Remember that an upward

trend is a period of successive rising highs and

rising lows. The head and shoulders chart

pattern, therefore, illustrates a weakening in a

trend by showing the deterioration in the

successive movements of the highs and lows.

2. Cup and Handle: A cup and handle chart is a

bullish continuation pattern in which the upward

trend has paused but will continue in an upward

direction once the pattern is confirmed.

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The price pattern forms what looks like a cup,

which is preceded by an upward trend. The handle

follows the cup formation and is formed by a

generally downward/sideways movement in the

security's price. Once the price movement pushes

above the resistance lines formed in the handle,

the upward trend can continue.

3. Double Tops and Bottoms:

This chart pattern is another well-known pattern

that signals a trend reversal - it is considered

to be one of the most reliable and is commonly

used. These patterns are formed after a sustained

66

trend and signal to chartists that the trend is

about to reverse. The pattern is created when a

price movement tests support or resistance levels

twice and is unable to break through. This

pattern is often used to signal intermediate and

long-term trend reversals.

A double top pattern is shown on the left, while

a double bottom pattern is shown on the right.

In the case of the double top pattern, the price

movement has twice tried to move above a certain

price level. After two unsuccessful attempts at

pushing the price higher, the trend reverses and

the price heads lower. In the case of a double

bottom (shown on the right), the price movement

has tried to go lower twice, but has found

support each time. After the second bounce off of

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the support, the security enters a new trend and

heads upward.

4. Triangles

Triangles are some of the most well-known

chart patterns used in technical analysis.

The three types of triangles, which vary in

construct and implication, are the

symmetrical triangle, ascending and

descending triangle. These chart patterns

are considered to last anywhere from a

couple of weeks to several months.

The symmetrical is a pattern in which two trend

68

lines converge toward each other. This pattern is

neutral in that a breakout to the upside or

downside is a confirmation of a trend in that

direction. In an ascending triangle, the upper

trend line is flat, while the bottom trend line

is upward sloping. This is generally thought of

as a bullish pattern in which chartists look for

an upside breakout. In a descending triangle, the

lower trend line is flat and the upper trend line

is descending. This is generally seen as a

bearish pattern where chartists look for a

downside breakout.

5.Flag and Pennants

These two short-term chart patterns are

continuation patterns that are formed when

there is a sharp price movement followed by

a generally sideways price movement. This

pattern is then completed upon another sharp

price movement in the same direction as the

move that started the trend. The patterns are

generally thought to last from one to three

69

weeks.

There

is

little difference between a pennant and a flag.

The main difference between these price movements

can be seen in the middle section of the chart

pattern. In a pennant, the middle section is

characterized by converging trend lines, much

like what is seen in a symmetrical triangle. The

middle section on the flag pattern, on the other

hand, shows a channel pattern, with no

convergence between the trend lines. In both

cases, the trend is expected to continue when the

price moves above the upper trend line

Triple Tops and Bottoms

70

Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis. These are not as prevalent in charts as head and shoulders and double tops and bottoms, but they act in a similar fashion. These two chart patterns are formed when the price movement testsa level of support or resistance three times and is unable to break through; this signals a reversal of the prior trend.

Confusion can form with triple tops and bottoms

during the formation of the pattern because they

can look similar to other chart patterns. After

the first two support/resistance tests are formed

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in the price movement, the pattern will look like

a double top or bottom, which could lead a

chartist to enter a reversal position too soon.

6.Rounding Bottom

A rounding bottom, also referred to as a

saucer bottom, is a long-term reversal pattern

that signals a shift from a downward trend to

an upward trend. This pattern is traditionally

thought to last anywhere from several Months

to several years.

A rounding bottom chart pattern looks similar to

a cup and handle pattern but without the handle.

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The long-term nature of this pattern and the lack

of a confirmation trigger, such as the handle in

the cup and handle, make it a difficult pattern.

SUPPORT AND RESISTANCE:-

Once you understand the concept of a trend, the

next major concept is that of support and resistance.

You'll often hear technical analysts talk about the

ongoing battle between the bulls and the bears, or the

struggle between buyers (demand) and sellers (supply).

This is revealed by the prices a security seldom moves

above (resistance) or below (support).

73

Support is the price level through which a stock

or market seldom falls (illustrated by the blue

arrows). Resistance, on the other hand, is the

price level that a stock or market seldom

surpasses (illustrated by the Red Arrows).

These support and resistance levels

are seen as important in terms of market

psychology and supply and demand. Support and

resistance levels are the levels at which a lot

of traders are willing to buy the stock (in the

case of a support) or sell it (in the case of

resistance). When these trend lines are broken,

the supply and demand and the psychology behind

the stock's movements is thought to have shifted,

in which case new levels of support and

resistance likely be established.

Role Reversal

Once a resistance or support level is

broken, its role is reversed. If the price falls

below a support level, that level will become

resistance. If the price rises above a resistance

level, it will often become support. As the price

74

moves past a level of support or resistance, it

is thought that supply and demand has shifted,

causing the breached level to reverse its role.

For a true reversal to occur, however, it is

important that the price make a strong move

through either the support or resistance.

For example, as you can see, the dotted line isshown as a level of resistance that has prevented

the price from heading higher on two previous

occasions (Points 1 and 2). However, once the

resistance is broken, it becomes a level of support

(shown by Points 3 and 4) by propping up the price

and preventing it from heading lower again.

Many traders who begin using technical analysis find

this concept hard to believe and don't realize that

this phenomenon occurs rather frequently, even with

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some of the most well-known companies. For example,

this phenomenon is evident on the Wal-Mart Stores

Inc. (WMT) chart between 2003 and 2006. Notice how

the role of the $51 level changes from a strong

level of support to a level of resistance.

In almost every case, a stock will have both

a level of support and a level of resistance

and will trade in this range as it bounces

between these levels.

The Importance of Support and

Resistance

76

Support and resistance analysis is an

important part of trends because it can be used

to make trading decisions and identify when a

trend is reversing.

Support and resistance levels both

test and confirm trends and need to be monitored

by anyone who uses technical analysis. As long as

the price of the share remains between these

levels of support and resistance, the trend is

likely to continue. It is important to note,

however, that a break beyond a level of support

or resistance does not always have to be a

reversal.

For example, if prices moved above the

resistance levels of an upward trending channel,

the trend have accelerated, not reversed. This

means that the price appreciation is expected to

be faster than it was in the channel.

Being aware of these important support and

resistance points should affect the way that you

trade a stock. Traders should avoid placing

orders at these major points, as the area around

77

them is usually marked by a lot of volatility. If

you feel confident about making a trade near a

support or resistance level, it is important that

you follow this simple rule: do not place orders

directly at the support or resistance level. This

is because in many cases, the price never

actually reaches the whole number, but flirts

with it instead. So if you're bullish on a stock

that is moving toward an important support level,

do not place the trade at the support level.

Instead, place it above the support level, but

within a few points. On the other hand, if you

are placing stops or short selling, set up your

trade price at or below the level of support.

MOVING AVERAGES:-

Most chart patterns show a lot of

variation in price movement. This can make

it difficult for traders to get an idea of a

security's overall trend. One simple method

traders use to combat this is to apply

moving averages. A moving average is the

average price of a security over a set

78

amount of time. By plotting a

security's average price, the price movement

is smoothed out. Once the day-to-day

fluctuations are removed, traders are better

able to identify the true trend and increase

the probability that it will work in their

favor.

Types of Moving Averages: -

There are a number of different types of moving averages that vary in the way they are calculated, but how each average is interpreted remains the same. The calculations only differ inregards to the weighting that they place on the price data, shifting from equal weighting of eachprice point to more weight being placed on recentdata. The three most common types of moving averages are simple, linear and exponential. 1. Simple Moving Average (SMA):

This is the most common method used to calculate

the moving average of prices. It simply takes the

sum of all of the past closing prices over the

time period and divides the result by the number

of prices used in the calculation. For example,

in a 10-day moving average, the last 10 closing

79

prices are added together and then divided by 10.

As you can see in Figure 1, a trader is able to

make the average less responsive to changing

prices by increasing the number of periods used

in the calculation. Increasing the number of time

periods in the calculation is one of the best

ways to gauge the strength of the long-term trend

and the likelihood that it will reverse.

Many individuals argue that the

usefulness of this type of average is

80

limited because each point in the data

series has the same impact on the result

regardless of where it occurs in the

sequence. The critics argue that the

most recent data is more important and,

therefore, it should also have a higher

weighting. This type of criticism has

been one of the main factors leading to

the invention of other forms of moving

averages.

2. Linear Weighted Average

This moving average indicator

is the least common out of the three and is

used to address the problem of the equal

weighting. The linear weighted moving

average is calculated by taking the sum of

all the closing prices over a certain time

period and multiplying them by the position

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of the data point and then dividing by the

sum of the number of periods. For example,

in a five-day linear weighted average,

today's closing price is multiplied by

five; yesterday's by four and so on until

the first day in the period range is

reached. These numbers are then added

together and divided by the sum of the

multipliers.

3. Exponential Moving Average (EMA) 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. A 15-period EMA raises and falls faster than a

15-period SMA. This slight difference doesn’t seem like

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much, but it is an important factor to be aware of since

it can affect returns.

Major Uses of Moving Averages

Moving averages are used to identify current

trends and trend reversals as well as to set up

support and resistance levels. Moving averages

can be used to quickly identify whether a

security is moving in an uptrend or a downtrend

depending on the direction of the moving average.

When a moving average is heading upward and the

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price is above it, the security is in an uptrend.

Conversely, a downward sloping moving average

with the price below can be used to signal a

downtrend.

Another method of determining momentum is to look at the

order of a pair of moving averages. When a short-term

average is above a longer-term average, the trend is up.

On the other hand, a long-term average above a shorter-

term average signals a downward movement in the trend.

Moving average trend reversals are formed in two

main ways: when the price moves through a moving average

and when it moves through moving average crossovers. The

first common signal is when the price moves through an

important moving average. For example, when the price of

a security that was in an uptrend falls below a 50-period

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moving average, it is a sign that the uptrend may be

reversing.

The other signal of a trend reversal is when one

moving average crosses through another. For

example, if the 15-day moving average crosses

above the 50-day moving average, it is a positive

sign that the price will

start to increase.

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.

If the periods used in the calculation are relatively

short, for example 15 and 35, this could signal a short-

term trend reversal. On the other hand, when two averages

with relatively long time frames cross over (50 and 200,

for example), this is used to suggest a long-term shift

in trend.

Another major way moving averages are used is to identify

support and resistance levels. It is not uncommon to see

a stock that has been falling stop its decline and

reverse direction once it hits the support of a major

moving average. A move through a major moving average is

often used as a signal by technical traders that the

trend is reversing. For example, if the price breaks

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through the 200-day moving average in a downward

direction, it is a signal that the uptrend is reversing.

Moving averages are a powerful tool for analyzing

the trend in a security. They provide useful

support and resistance points and are very easy

to use. The most common time frames that are used

when creating moving averages are the 200-day,

100-day, 50-day, 20-day and 10-day. The 200-day

average is thought to be a good measure of a

87

trading year, a 100-day average of a half a year,

a 50-day average of a quarter of a year, a 20-day

average of a month And 10 – day average of two

weeks. Moving averages help technical traders

smooth out some of the noise that is found in

day-to-day price movements, giving traders a

clearer view of the price trend. So far we have

been focused on price movement, through charts

and averages. In the next section, we'll look at

some other techniques used to confirm price

movement and patterns.

Technical Indicators

BOLLINGER BANDS

Overview

Bollinger Bands are similar to

moving average envelopes. The difference between

Bollinger Bands and envelopes is envelopes are

plotted at a fixed percentage above and below a

moving average, whereas Bollinger Bands are

plotted at standard deviation levels above and

below a moving average. Since standard deviation

88

is a measure of volatility, the bands are self-

adjusting: widening during volatile markets and

contracting during calmer periods.

Bollinger Bands were created by John Bollinger.

Interpretation Bollinger Bands are usually displayed

on top of security prices, but they can be

displayed on an indicator. These comments refer

to bands displayed on prices. As with moving

average envelopes, the basic interpretation of

Bollinger Bands is that prices tend to stay

within the upper- and lower-band. The distinctive

characteristic of Bollinger Bands is that the

spacing between the bands varies based on the

volatility of the prices. During periods of

extreme price changes (i.e., high volatility),

the bands widen to become more forgiving. During

periods of stagnant pricing (i.e., low

volatility), the bands

Narrow to contain prices.

Following are characteristics of Bollinger

89

Bands.

• Sharp price changes tend to occur after the

bands tighten, as volatility lessens.

• When prices move outside the bands, a

continuation of the current trend is implied

• Bottoms and tops made outside the bands

followed by bottoms and tops made inside the

bands call for reversals in the trend.

• A move that originates at one band tends to go

all the way to the other band. This observation

is useful when projecting price targets.

MACD

OverviewThe MACD ("Moving Average

Convergence/Divergence") is a trend following

momentum indicator that shows the relationship

between two moving averages of prices. The MACD

was developed by Gerald Appel, publisher of

Systems and Forecasts. The MACD is the difference

between a 26-day and 12-day exponential moving

average. A 9-day exponential moving average,

called the "signal" (or "trigger") line is

plotted on top of the MACD to show buy/sell

90

opportunities. (Apple specifies exponential

moving averages as percentages. Thus, he refers

to these three moving averages as 7.5%, 15

and 20% respectively.)

Interpretation: The MACD proves most effectivein wide-swinging trading markets. There are three

popular ways to use the MACD: crossovers,

overbought/oversold conditions, and divergences.

Crossovers

The basic MACD trading rule is to sell when the

MACD falls below its signal line. Similarly, a

buy signal occurs when the MACD rises above its

signal line. It is also popular to buy/sell when

the MACD goes above/below zero.

Overbought/Oversold Conditions

The MACD is also useful as an overbought/oversold

indicator. When the shorter moving average pulls

away dramatically from the longer moving average

(i.e., the MACD rises), it is likely that the

security price is overextending and will soon

return to more realistic levels. MACD overbought

and oversold conditions exist vary from security

to security.

91

Divergences

An indication that an end to the current trend

may be near occurs when the MACD diverges from

the security. A bearish divergence occurs when

the MACD is making new lows while prices fail to

reach new lows. A bullish divergence occurs when

the MACD is making new highs while prices fail to

reach new highs. Both of these divergences are

most significant when they occur at relatively

overbought/oversold levels.

MOMENTUM

OverviewThe Momentum indicator measures the amount that a

security's price has changed over a given time

span.

InterpretationThe interpretation of the Momentum indicator is

identical to the interpretation of the Price ROC.

Both indicators display the rate-of change of a

security's price. However, the Price ROC

indicator displays the rate-of-change as a

percentage whereas the Momentum indicator

92

displays the rate-of-change as a ratio.

VOLUME

Overview Volume is simply the number of shares

(or contracts) traded during a specified time

frame (e.g., hour, day, week, month, etc). The

analysis of volume is a basic yet very important

element of technical analysis. Volume provides

clues as to the intensity of a given price move.

Interpretation Low volume levels are characteristic

of the indecisive expectations that typically

occur during consolidation periods (i.e., periods

where prices move sideways in a trading range).

Low volume also often occurs during the

indecisive period during market bottoms. High

volume levels are characteristic of market tops

when there is a strong consensus that

Prices will move higher. High volume levels are

also very common at the beginning of new trends

(i.e., when prices break out of a trading range).

Just before market bottoms, volume will often

93

increase due to panic-driven selling.

Volume can help determine the health of an

existing trend. A healthy up-trend should have

higher volume on the upward legs of the trend,

and lower volume on the downward (corrective)

legs. A healthy downtrend usually has higher

volume on the downward legs of the trend and

lower volume on the upward (corrective) legs.

RATE OF CHANGE (ROC): Rate of change measures the

rate at which prices rise or fall.

It is based on the principle that prices usually

rise and fall at the fastest pace well ahead of

their peak and before their trough respectively.

10 – Day ROCThe concept of ROC can be explained with the help of a

single example. A ball thrown into the Air generally

shoots up with speed but subsequently shows down

considerably before it turns to come down again. The

loss of upward momentum that occurs before the ball

changes course can be seen in the stock market also.

Before peaking out, share process registers a noticeable

decrease in momentum.

THE CALCULATION OF 10 DAY RATE OF CHANGE

DAY

SHARE

PRICE

SHARE PRICE 10 DAYS

AGO

ROC 10 DAYS

AGO

94

1 2 3 (4) =(2)/(3)1 2079.5    2 2065.05    3 2106.05    4 2165.2    5 2151.1    6 2178.1    7 2189.35    8 2160    9 2125    10 2197    11 2247.95 2079.5 1.08112 2343 2065.05 1.13513 2421.35 2106.05 1.15014 2448 2165.2 1.13115 2252.95 2151.1 1.04716 2270 2178.1 1.04217 2205.15 2189.35 1.00718 2119 2160 0.98119 2229.95 2125 1.04920 2250.5 2197 1.02421 2206 2247.95 0.98122 2242.2 2343 0.95723 2167 2421.35 0.89524 2148.65 2448 0.87825 2151 2252.95 0.95526 2240.05 2270 0.98727 2309.25 2205.15 1.04728 2328.6 2119 1.099

95

29 2357.7 2229.95 1.05730 2292 2250.5 1.018

The concept of ROC can be explained with the help

of a single example. A ball thrown into the air

generally shoots up with speed but subsequently

shows down considerably before it turns to come

down again. The loss of upward momentum that

occurs before the ball changes course can be seen

in the stock market also. Before peaking out,

share process registers a noticeable decrease in

momentum. To measure the rate of change, the

ratio of the most recent closing price to the

price for a certain number of days in the past is

worked out. To calculate a 10 days ROC, the

latest closing price is divided by the closing

96

price of the scrip 10 days ago. If the latest

price is higher than that of the historical price

for the ten previous days, the ROC value will be

above the line 1 and vice versa. In the following

table an example of 10 days ROC is explained.

Under column 2 the share price movement of a

company is provided for 20 days while under

column 3 the prices ruling 10 days ago has been

taken.

In the last column, the ROC values are arrived

at by dividing the current day’s price by the

price 10 days ago.

The ROC values are available from the 11th day

only as for the first 10 trading days. The 10

days back share prices are not available. It is

worth noting that the share prices are available

only on the trading that actually took place in

the market.

Therefore, the ROC is computed for 10 trading

days and not 10 calendar days.

The share price has been increased by Re. 1 on

every day trading day from day 1 to day 15.

However, the ROC declined continuously from the

11th day to 15th day, though the share price in

97

rupees terms increased.

This indicates that though there was a share

price rise in absolute terms, in percentage terms

the rise in share price declined during that

period.

If the ROC line is above 1; the current day

price is higher than that of 10 days ago.

If the ROC line is above 1 and rising; the

difference between the current day price and

10 days back price grows at an increasing

rate (bullish signal).

If ROC line is above 1, but declining; the

price rises at a lower rate than the earlier

growth rate (bearish signal)

If the ROC line is below 1, the current

day’s price is lower than the price 10 days

ago.

If the ROC line is below 1 and falling, the

difference between 10 days price and 10 days

back price grows at a faster rate (bearish

signal).

If the ROC line is below 1, but rising, the

rate of decline slows down (bullish signal).

The ROC line is so constructed that it is

98

always a step ahead of the price movement.

It gives an advance signal before the share

price line takes a reversal direction.

Relative Strength Index

Relative Strength Index (RSI) us is one of the

very few sophisticated Oscillators used in

technical analysis. The others which we have

already discussed in the previous issues are

stochastic and MACD. The rate of change and

momentum are some of the widely used simple

oscillators. There are some flaws like erratic

movement due to sudden drop or rise in the price

movement even in a single trading day in the

usage of simple oscillators. For instance, in a

10 day momentum, a sharp advance or decline ten

days back can cause sudden shifts in momentum

line even if there is a marginal or no change in

current prices. Therefore, it is necessary to

reduce these distortions and smoothen the

oscillator indicator distortions and smoothen the

oscillator indictor distortion and smoothen the

oscillator indicator. The other problem in

simple oscillators is that there is no specified

99

range on vertical scale. Mainly to address these

two major problems of simple oscillators RSI was

developed by J. Welles Wilder, Jr. in 1978. RSI

indicator provides not only the required

smoothing but also 0 and 100 as lower and upper

limits respectively for its vertical scale.

RSI is calculated using the following formula.

RSI=100 – {100 / (1+RS)}

Where RS = Average of n periods price

gains

Average of n periods price

losses

7 day RS value = (8/7) / (4/7) = 1.143 / 0.571=2

RSI= 100 – {100 / (1+RS)}

= 100 – {100 / (1+2)

=100- 33.33 = 66.67.

The RSI value for the seventh day is 66.67. For

calculating the RSI value for the eighth day, we

have to exclude the first day closing price and

include the price on the eighth day. We can

calculate RSI for any time period. The most

widely used period is 14 days. Some technical

analysts also use lesser time periods like 5 -

100

day, 7 – day, 9 – day to get the quicker signals.

Like I any other Oscillators, shorter the time

period, the more sensitive and volatile the RSI

becomes. Therefore, to reduce the misleading

signals Wilder recommended and used a 14 day

period for constructing RSI.

RSI CALCULATIONCHANGE IN PRICE OVER

PREVIOUS DAYDAY CLOSING PRICE GAIN LOSS1 43 0 02 45 2 03 44 0 14 46 2 05 45 0 16 43 0 27 47 4 0 

TOTAL   8  4

101

Interpretation:

The RSI values are plotted on chart with a

vertical scale of 0 to 100.

If the RSI moves above the value 70, it is

considered as overbought.

If the RSI moves below the value 30, it is

treated as an oversold zone.

In other words, there may be down trends in the

price after the RSI moving above the 70 level and

prices may recover and look up after the RSI

falls below 30 level. Generally, RSI indicator

crosses the 70 level much before the share price

touches the peak. Similarly, RSI line goes below

the 30 level well ahead of price lifting the

bottom. Hence, RSI gives an advance signal for

reversal share price movements.

Failure swings: we can see the failure in rallies

and also in declines when the RSI is above 70 and

30 respectively. Failure “A” in rally when the

RSI rises above 70 rises again but fails to reach

the level 70 and below the prior lower level.

This is a clear sell signal. Failure at bottom

of when the RSI in a downtrend. Failure “B”

explains the failure in decline when fails to set

102

new low and starts an uptrend to exceed previous

peak.

Divergence:

According to Wilder, divergence is the most

indicative character of the RSI which gives a

warning signal for likely reversal in share

movement. Hence, the divergence is between the

RSI line and the share price. For instance, if

the RSI line is falling below from the level of

80 to 70 and a same time the share price is still

in an uptrend, it gives as indication that the

share price is also likely to reverse its

direction shortly. This divergence gives a sell

signal.

Similarly, we get a buy signal when the RSI line

is moving up below the level 30 and at the same

time the share price is still continuing in a

downtrend.

The RSI indicator simply means

Buy, when the RSI line is crossing up through

the 50 level and

Sell, when the RSI line is crossing down

through the 50 level.

We can also identify the chart patterns like

103

triangles, flags, rectangles in the RSI line and

interpret the same way as in price chart.

Support and Resistance levels also can be drawn

for RSI charts.

These Oscillators are quite useful only for short

terms investors and traders. These are not

useful for long term investors, because they

cannot simply sell their shares for the simple

reason that RSI has moved above the 70 level.

The first entry of RSI into the overbought zone

is only a first warning signal. One has to wait

for further confirmations before really

liquidating his portion

104

CHAPTER-4 DATA ANALYSIS

TECHNICAL ANALYSIS OF SBI

105

Technical Analysis of State Bank of India:

3 Years data taken (1st-Jan-2009 to 27th-Feb-2012)

DATA TABLE

Date Open High Low Close Volume

Adj Close

1 Feb,2012

2,054.00

2,474.80

1,975.05

2,243.40 866,300 2,160.97

2 Jan,2012

1,625.20

2,083.80

1,611.50

2,061.05 583,800 1,985.32

1 Dec,2011

1,812.00

1,951.75

1,576.00

1,619.50 819,400 1,559.99

1 Nov,2011

1,894.00

2,018.25

1,629.10

1,762.85 899,300 1,698.07

3 Oct,2011

1,884.90

1,989.50

1,708.55

1,906.70 827,000 1,836.64

2 Sep,2011

1,990.00

2,049.00

1,812.90

1,911.10 709,500 1,840.88

1 Aug,2011

2,366.90

2,383.85

1,872.00

1,972.00 570,700 1,899.54

1 Jul,2011

2,419.80

2,959.65

1,973.15

2,342.00 338,900 2,255.94

1 Jun,2011

2,308.00

2,430.00

2,123.00

2,405.95 455,000 2,317.54

20-May-2011 30.00 Dividend

2 May,2011

2,811.50

2,819.55

2,165.00

2,297.80 715,700 2,213.37

1 Apr, 2,772. 2,959. 2,707. 2,805. 349,000 2,667.68

106

2011 00 90 00 60

1 Mar,2011

2,651.00

2,888.00

2,523.55

2,767.90 445,000 2,631.83

1 Feb,2011

2,651.90

2,813.40

2,478.60

2,632.00 662,100 2,502.61

3 Jan,2011

2,830.05

2,852.45

2,468.80

2,641.05 780,700 2,511.22

1 Dec,2010

2,998.00

3,172.00

2,655.70

2,811.05 652,800 2,672.86

1 Nov,2010

3,187.00

3,515.00

2,777.00

2,994.10 662,700 2,846.91

1 Oct,2010

3,250.00

3,322.00

3,077.00

3,151.20 280,700 2,996.29

1 Sep,2010

2,772.00

3,268.00

2,738.75

3,233.20 457,200 3,074.26

2 Aug,2010

2,520.00

2,884.00

2,511.00

2,764.85 482,200 2,628.93

1 Jul,2010

2,290.00

2,519.90

2,254.40

2,503.80 343,500 2,380.71

09-Jun-2010 20.00 Dividend

1 Jun,2010

2,260.00

2,402.50

2,201.00

2,302.10 403,300 2,188.93

3 May,2010

2,291.00

2,348.80

2,138.00

2,268.35 505,800 2,137.95

1 Apr,2010

2,085.00

2,318.80

2,015.00

2,297.95 411,100 2,165.85

1 Mar,2010

1,975.85

2,120.05

1,975.85

2,079.00 326,300 1,959.49

05-Feb-2010 10.00 Dividend

1 Feb,2010

2,045.00

2,059.95

1,863.00

1,975.85 522,800 1,862.27

1 Jan,2010

2,269.45

2,315.25

1,957.00

2,058.00 527,900 1,929.74

1 Dec,2009

2,253.05

2,374.75

2,126.20

2,269.45 534,900 2,128.01

2 Nov,2009

2,191.00

2,394.00

2,059.10

2,238.15 691,000 2,098.67

1 Oct,2009

2,180.10

2,500.00

2,048.20

2,191.00 739,200 2,054.45

1 Sep,2009

1,760.00

2,235.00

1,710.10

2,195.70 461,800 2,058.86

3 Aug, 1,825. 1,886. 1,670. 1,743. 428,700 1,634.42

107

2009 00 90 00 05

1 Jul,2009

1,737.90

1,840.00

1,512.00

1,814.00 650,300 1,700.95

10-Jun-2009 29.00 Dividend

1 Jun,2009

1,875.00

1,935.00

1,612.00

1,742.05 651,200 1,633.48

1 May,2009

1,277.70

1,891.00

1,225.00

1,869.10 880,400 1,723.79

1 Apr,2009

1,079.70

1,355.00 980.00 1,277.

70 822,400 1,178.37

2 Mar,2009

1,010.00

1,132.25 894.00 1,066.

551,104,0

00 983.63

2 Feb,2009

1,141.10

1,205.90

1,008.30

1,027.10 773,400 947.25

1 Jan,2009

1,294.45

1,376.40

1,031.05

1,152.20

1,006,200 1,062.62

108

Bar chart

109

Candle Stick Chart

110

Line Chart

111

Rate of Change (ROC):SHOWING CHANGE IN

PRICE OF STOCK

112

Relative Strength Index (RSI):

113

114

When 50 DMA crosses 200 DMA in Upside that

time In Technical words it’s called as

GOLDEN CROSS it’s a strong bullish signal

115

116

CHAPTER-5 Findings &Conclusion

117

FINDINGS:

As per Analysis of charts of SBIN :

SBI has strong support @ 2040 & 1880 &

Resistance @ 2190, 2390 & 2450.

RSI is crossing up 50 level which

Indicate Buy Signal.

we see 10 days ROC is above 1 but

declining the price rises at lower rate

than the earlier growth rate which

indicate bearish signal.

But if we take 3 years data and

calculate ROC then we can see “ROC lineis above 1 and rising; the difference

between the current day price and 10 days

back price grows at an increasing rate

118

(bullish signal)”

CONCLUSION : Buying and selling of stock is not an

easy task if you want to make money doing

it. Millions of investors have lost the

money in past trying guessing stock price

119

movements. In order to consistently make

money in the stock market, investors have

to be right over 70% of the time.

In today’s world, if you rely on

fundamental analysis, broker’s advice

newspaper, articles or business channels

for your investing or trading decisions,

you are asking for a painful experience in

the markets. So, this study on technical

analysis will help the investors in

analyzing the scripts based on the

technical tools and oscillators to earn

fruitful investment.

Technical analysis is the art and

science of chart patterns in order to

better analyze and predict prices of a

120

given security.

It is also becoming popular with the

younger generation. But further

research has to be conducted to know

whether the technical analysis alone

will guarantee profits to the

investors.

Knowledge of the stock markets is the

key to the success and emphasis should

be on managing trading risk while

technical analysis can help you to

control them.

There is evidence in support of the

usefulness of moving averages,

momentum, support and resistance and

some patterns; but no convincing

evidence in support of Gann Theory or

Elliott Wave Theory.

Technical analysis works best on

121

currency markets, intermediate on

futures markets, and worst on stock

markets.

Chart patterns work better on stock

markets than currency markets.

Technical analysis doesn't work as

well as it used to.

After detail analysis of charts

showing above using the tools of the

technical analysis,I come to conclusion

to Buy stock of SBIN at current level

i.e. 2100-2130,

Short term Target 2190 & 2390,

Stop Loss @ 2040

Long Term Target above 2390

2540 and above this level 2600 - - 2700

Targets is there, Stop Loss @ 2040

122

BIBLIOGRAPHY: BOOKS REFERRED:

1) Security Analysis and Portfolio

Management by Dr. Punithavathi Pandian

in the year 2008 – Publication: Vikas

Publishing House Pvt Ltd.

2) “NCCFM” module of Technicalanalysis”

WEBSITES:www.investopedia.comwww.onlinetradingconcepts.comwww.nseindia.comwww.bseindia.com http://www.icharts.inhttp://www.moneycontrol.comhttp://www.icharts.comhttp://www.yahoofinance.comhttp://www.stocata.orghttp://www.googlefinance.com

Assisted by my mentor Mr. Amit Jain Technical

Analyst (Smart Equity Brokers Pvt. Ltd) who

expertise in technical analysis in Stock

123

market