Rishikesh R Kshirsagar Masters in Financial Services Management (M.F.S.M) Academic Year !"##$#! %nder the &'idance of (rof. Pankaj Bhattacharjee University of Mumbais Alkesh Dinesh Mody Institute For Financial and Management Studies # Declaration I) Mr. Rishikesh Ravindra Kshirsagar *YMFSM St'dent of Alkesh +inesh Mody Instit'te for Financial and Management St'dies) here,y declare that I have com-leted the -ro.ect titled *echnical analysis of State Bank of India d'ring the academic year !"##$!"#!. *he re-ort /ork is original and the information0data incl'ded in the re-ort is tr'e to the ,est of my Kno/ledge. +'e credit is e1tended on the /ork of 2iterat're0Secondary S'rvey ,y endorsing it in the Bi,liogra-hy as -er -rescri,ed format.
Signat're of the St'dent /ith +ate Rishikesh Ravindra Kshirsagar ! University of Mumbais Alkesh Dinesh Mody Institute For Financial and Management Studies Certifcate I) (rofessor Pankaj Bhattacharjee here,y certify that Mr. Rishikesh Ravindra Kshirsagar) *YMFSM St'dent of Alkesh +inesh Mody Instit'te for Financial and Management St'dies has com-leted a -ro.ect titled *echnical analysis of State Bank of India in the academic year !"##$!"#!. *he /ork of the st'dent is original and the information incl'ded in the -ro.ect is tr'e to the ,est of my Kno/ledge. Signat're of &'ide /ith +ate (rof. (anka. Bhattachar.ee 3 TAB! "F #"$T!$TS S%$"% &A'TI#UA'S &A(! $"% 1. Introduction 5 2. Technical analysis 8 3 Dow Theory 10 4 Drawbacks / limitations o technical analysis 15 5 Tools ! Instruments in technical analysis 18 " #hart Ty$es 20 % Trends In Technical &nalysis 3% 8 'hy (olume Is Im$ortant 45 ) #hart *atterns 48 10 Technical Indicators %3 11 Technical analysis o +,tate -ank o India. 8% 12 -iblio/ra$hy )5 4 I$T'"DU#TI"$)* +,ATS T,IS !-UIT. A$A.SIS/ *roessional in0estor will make more money ! less loss than1 who let their heart rule. Their head eliminate all emotions or decision makin/. -e ruthless ! calculatin/1 you are out to make money. Decision should be based on actual mo0ement o share $rice measured both in money ! $ercenta/e term ! nothin/ else. 2reed must be a0oided *atience may be a 0irtue1 but im$atience can re3uently be $roitable. In !0uity Analysis antici$ated /rowth1 calculations are based on considered 4&#T, ! not on 56*7. 73uity analysis is basically a combination o two inde$endent analyses1 namely fundamental analysis 1 Technical analysis% The sub8ect o 73uity analysis1 i.e. the attem$t to determine uture share $rice mo0ement ! its reliability by reerences to historical data is a 0ast one1 co0erin/ many as$ect rom the calculatin/ 0arious FI$A$#IA 'ATI"S1 $lottin/ o #,A'TS to e9tremely so$histicated indicators. & /eneral in0estor can a$$ly the $rinci$les by usin/ the sim$lest o tools: $ocket calculator1 $encil1 ruler1 chart $a$er ! your cautious mind1 watchul attention. It should be $ointed out that1 this e3uity analysis does not discuss how to buy ! sell shares1 but does discuss a method which 5 enables the in0estor to arri0e at buyin/ ! sellin/ decision. The inancial analysts always need yardsticks to e0aluate the eiciency ! $erormances o any business unit at the time o in0estment. 4undamental analysis is useul in lon/ term in0estment decision. In 4undamental analysis a com$any s /oodwill1 It;s $erormances1 li3uidity1 le0era/e1 turno0er1 $roitability ! inancial health was checked ! analysis with the hel$ o ratio analysis or the $ur$ose o lon/ term successul in0estment. Technical analysis reers to the study o market /enerated data like $rices ! 0olume to determine the uture direction o $rices mo0ements. Technical analysis mainly seeks to $redict the short term $rice tra0els. The ocus o technical analysis is mainly on the internal market data1 i.e. $rices ! 0olume data. It a$$eals mainly to short term traders. It is the oldest a$$roach to e3uity in0estment datin/ back to the late 1)th century. Assum2tions for the !0uity Analysis% 1. 'orks only in normal share<market conditions with /reat reliability1 it also works in abnormal share<market conditions1 but with low reliability. 6 2. 73uity analysis is $urely based on the I=(7,T>7=T *5I?6,6*5@1 so the in0estment ob8ect has 0ital im$ortance associated to return alon/ with risk. 3. #ash mana/ement /ets the ma/nitude role1 because the scenario o e3uity analysis is re0ol0in/ around the term money 4. *ortolio mana/ement1 risk mana/ement was u$ to the in0estor s knowled/e. 5. #a$ital market trend is always a riend1 whether it is short run or lon/ run. ". @ou are buyin/ stock ! not com$anies1 so don t are curious or $anic to do *ost<mortem o com$anies; $erormances %. 5istory re$eats: in0estors ! s$eculators react the same way to the same ty$es o e0ents homo/eneously. 8. #a$ital market has a ty$ical market $sycholo/y alon/ with other issues likeA $erce$tions1 the crowd (s the indi0idual1 tradition s ! trust. 7 ). &n indi0idual $erce$tions about the in0estment return ! associated risk may dier rom indi0idual to indi0idual. 10. <hou/h the e3uity analysis is art as well as sciences so1 it also has some 79ce$tions !-UIT. A$A.SIS
FU$DAM!$TA T!#,$I#A A$A.SIS A$A.SIS 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 $redict the short term $rice tra0els. It is im$ortant criteria or selectin/ the com$any to in0est. It also $ro0ides the base or decision<makin/ in in0estment. The one o the most 8 re3uently used yardstick to check ! analyBe underlyin/ $rice $ro/ress. 4or that matter a 0erity o tools was consider. This Technical analysis is hel$ul to /eneral in0estor in many ways. It $ro0ides im$ortant ! 0ital inormation re/ardin/ the current $rice $osition o the com$any. Technical analysis in0ol0es the use o 0arious methods or chartin/1 calculatin/ ! inter$retin/ /ra$h ! chart to assess the $erormances ! status o the $rice. It is the tool o inancial analysis1 which not only studies but also relectin/ the numerical ! /ra$hical relationshi$ between the im$ortant inancial actors. The ocus o technical analysis is mainly on the internal market data1 i.e. $rices ! 0olume data. It a$$eals mainly to short term traders. It is the oldest a$$roach to e3uity in0estment datin/ back to the late 1)th century. It uses charts and com$uter $ro/rams to study the stock;s tradin/ 0olume and $rice mo0ements in the ho$e o identiyin/ a trend. In act the decision made on the basis o technical analysis is done only &ter inerrin/ a trend and 8ud/in/ the uture mo0ement o the stock on the basis o the trend. Technical &nalysis assumes that the market is eicient and the $rice has already taken into consideration the other actors related to the com$any and the industry. It is because o this 9 assum$tion that many think technical analysis is a tool1 which is eecti0e or short<term in0estin/. D"+ T,!"'.)* #harles Dow who was editor o 'all ,treet Cournal in 1)00 is known or the most im$ortant theory de0elo$ed by him with technical indicators. In act1 the theory /ained so much si/niicance that the theory was named ater him. The Dow Theory has been urther de0elo$ed by other technical analysts and it orms the basis o the technician;s theory. The theory $redicts trends in the market or indi0idual and total e9istin/ securities. It also shows re0ersals in stock $rices. &ccordin/ to DDow theory;1 the market always has three mo0ements and the mo0ements are simultaneous in the nature. These mo0ements may be described as:< The narrow mo0ement which occurs rom day to day. #" The short swin/ which usually mo0es or short time like two weeks and e9tends u$ to a monthA this mo0ement can be called a short term mo0ement1 and The third mo0ement is also the main mo0ement and it co0ers or years in its duration. &ccordin/ to the ty$e o mo0ements1 they ha0e been /i0en s$ecial names. The narrow mo0ement is called 3fluctuations the short swin/ is better known as 3secondary movements and the main mo0ement is also called the 32rimary trends% =arrow mo0ements are called 3fluctuations% ,econdary mo0ements are those which last only or a short while and they are also known as 4corrections5% *rimary trends are1 thereore1 the main mo0ement in the stock market. It is also called 3Bears5 and 3Bulls5 market% &ccordin/ to the Dow Theory1 the $rice mo0ements in a market can be identiied by means o a line<chart. ## In this chart the technical analyst should $lot the $rice o the share. 'ith it1 he should also mark the market a0era/e e0ery day. This would hel$ in identiyin/ the $rimary and secondary mo0ements. Dow theorists belie0e in Dmomentum;1 which1 accordin/ to them1 kee$s the $rice mo0in/ in the same direction. They belie0e in $rimary trends1 which accordin/ to them are momentum or bear and bull markets. The momentum will carry the $rices urther but momentum o $rimary trend will be halted by the terminolo/y used by technical analysts called Dsu$$ort areas; and Dresistance areas;. #riticism of Do6 Theory The Dow Theory is sub8ect to 0arious limitations in actual $ractice. Dow has de0elo$ed this theory to de$ict the /eneral trend o the market but not with the intention o $ro8ectin/ the #! uture trend or to dia/nose the buy and sell si/nals in the market. These a$$lications o the Dow Theory ha0e come in the li/ht o analytical studies o inancial analysts. This theory is criticiBed on the /round that it is too sub8ecti0e and based on historical inter$retationA it is not inallible as it de$ends on the inter$retati0e ability o the analyst. The results o this theory do not also /i0e meanin/ul and conclusi0e e0idence o any action to be taken in terms o buy and sell o$erations. #andlestick #harting The candle is com$rised o two $arts1 the body and the shadows. The body encom$asses the o$en and closin/ $rice or the $eriod. The candle body is black i the security closed below the o$en1 and white i the close was hi/her than the o$en or the $eriod. The candlestick shadow encom$asses the intra $eriod hi/h and low. #3 ,istory of Technical Analysis) Technical &nalysis as a tool o in0estment or the a0era/e in0estor thri0ed in the late nineteenth century when #harles Dow1 then editor o the 'all ,treet Cournal1 $ro$osed the Dow Theory. 5e reco/niBed that the mo0ement is caused by the action/reaction o the $eo$le dealin/ in stocks rather than the news in itsel. Technical analysis is a method o e0aluatin/ securities by analyBin/ the ,tatistics /enerated by market acti0ity1 such as $ast $rices and 0olume. Technical analysts do not attem$t to measure a securityEs intrinsic 0alue1 but instead use charts and other tools to identiy $atterns that can su//est uture acti0ity. Cust as there are many in0estment styles on the undamental side1 There are also many dierent ty$es o technical traders. ,ome rely on chart $atternsA others use technical indicators and oscillators1 and most use some combination o the two. In any case1 technical analystsE e9clusi0e use o historical $rice and 0olume data is what se$arates them rom their undamental counter$arts. Fnlike undamental analysts1 technical analysts donEt care whether a stock is under0alued the only #4 thin/ that matters is a securityEs $ast tradin/ data and what inormation this data can $ro0ide about where the ,ecurity mi/ht mo0e in the uture. Basic 2remises of technical analysis) 7% >arket $rices are determined by the interaction o su$$ly ! demand orces. 8% ,u$$ly ! demand are inluenced by 0ariety o su$$ly ! demand ailiated 4actors both rational ! irrational 9% These include undamental actors as well as $sycholo/ical actors. :% -arrin/ minor de0iations stock $rices tend to mo0e in airly $ersistent trends. ;% ,hits in demand ! su$$ly brin/ about chan/e in trends. <% This shit s can be detected with the hel$ o charts o manual ! com$uteriBed action1 because o the $ersistence o trends ! $atterns analysis o $ast market data can be used to $redict uture $rices beha0iours. #5 Dra6backs = limitations of technical analysis) 1. Technical analysis does not able to e9$lain the reBones behind the em$loyment or selection o s$eciic tool o Technical analysis. 2. The technical analysis ailed to si/nal an u$trend or downtrend in time. 3. The technical analysis must be a sel deeatin/ $ro$osition. &s more ! more $eo$le use1 em$loy it the 0alue o such analysis trends to reduce. +hy 6e use T!#,$I#A A$A.SIS/ 1G Technical analysis $ro0ides inormation on the best entry and 79it $oints or a trade. 2G 6n a chart1 the trader can see where momentum is risin/1 a Trend is ormin/1 a $rice is di$$in/ or other e0ents are de0elo$in/ that show the best entry $oint and time or the most $roitable trade. 'ith the constant mo0ement o 0arious currencies a/ainst each other in the 4ore9 market1 most Traders will ocus on usin/ technical indicators to ind and $lace their Trades IS T!#,$I#A A$A.SIS DIFFI#UT/ 1G Technical analysis is not diicult1 but it re3uires studyin/ Dierent ty$es o charts such as the hourly or daily charts1 knowin/ which technical indicators to use and how to use them. 2G #om$uters and the Internet ha0e made this $rocess much easier. #6 >ost brokers $ro0ide basic charts and technical indicators or ree or at a 0ery low cost. 3G 6ne way to a0oid /ettin/ rustrated by all the lines1 colours1 and 2ra$hics is to ocus on usin/ only a ew indicators that will *ro0ide you with the inormation needed. Try not to clutter your #hart with too much inormation. Fundamental vs% Technical Analysis Technical analysis and undamental analysis are the two main schools o thou/ht in the inancial markets. &s weE0e mentioned1 technical analysis looks at the $rice mo0ement o a security and uses this data to $redict its uture $rice mo0ements. 4undamental analysis1 on the other hand1 looks at economic actors1 known as undamentals. 4undamental analysis takes a relati0ely lon/<term a$$roach to analyBin/ the market com$ared to technical analysis. 'hile technical analysis can be used on a timerame o weeks1 days or e0en minutes1 undamental analysis oten looks at data o0er a number o years. The future can be found in the 2ast #7 I $rices are based on in0estor e9$ectations1 then knowin/ what a security should sell or Hi.e.1 undamental analysisG becomes less im$ortant than knowin/ what other in0estors e9$ect it to sell or. ThatEs not to say that knowin/ what a security should sell or isnEt im$ortant<<it is. -ut there is usually a airly stron/ consensus o a stockEs uture earnin/s that the a0era/e in0estor cannot dis$ro0e. Technical analysis is the $rocess o analyBin/ a securityEs historical $rices in an eort to determine $robable uture $rices. This is done by com$arin/ current $rice action Hi.e.1 current e9$ectationsG with com$arable historical $rice action to $redict a reasonable outcome. The de0out technician mi/ht deine this $rocess as the act that history re$eats itsel while others would suice to say that we should learn rom the $ast. Usually the follo6ing tools 1 instruments are used to do the technical analysis) &rice Fields Technical analysis is based almost entirely on the analysis o $rice and 0olume. The ields which deine a securityEs $rice and 0olume are e9$lained below. #8 "2en < This is the $rice o the irst trade or the $eriod He./.1 the irst trade o the dayG. 'hen analyBin/ daily data1 the 6$en is es$ecially im$ortant as it is the consensus $rice ater all interested $arties were able to Islee$ on it.I ,igh < This is the hi/hest $rice that the security traded durin/ the $eriod. It is the $oint at which there were more sellers than buyers Hi.e.1 there are always sellers willin/ to sell at hi/her $rices1 but the 5i/h re$resents the hi/hest $rice buyers were willin/ to $ayG. o6 < This is the lowest $rice that the security traded durin/ the $eriod. It is the $oint at which there were more buyers than sellers Hi.e.1 there are always buyers willin/ to buy at lower $rices1 but the ?ow re$resents the lowest $rice sellers were willin/ to acce$tG. #lose < This is the last $rice that the security traded durin/ the $eriod. Due to its a0ailability1 the #lose is the most oten used $rice or analysis. The relationshi$ between the 6$en Hthe irst $riceG and the #lose Hthe last $riceG are considered si/niicant by most technicians. This relationshi$ is em$hasiBed in candlestick charts. >olume < This is the number o shares Hor contractsG that were traded durin/ the $eriod. The relationshi$ between $rices and 0olume He./.1 increasin/ $rices accom$anied with increasin/ 0olumeG is im$ortant. #9 "2en Interest < This is the total number o outstandin/ contracts Hi.e.1 those that ha0e not been e9ercised1 closed1 or e9$iredG o a uture or o$tion. 6$en interest is oten used as an indicator. Bid < This is the $rice a market maker is willin/ to $ay or a security Hi.e.1 the $rice you will recei0e i you sellG. Ask < This is the $rice a market maker is willin/ to acce$t Hi.e.1 the $rice you will $ay to buy the securityG. &rice Styles ?#harts Ty2es@ *rice in a chart can be dis$layed in our styles: 1. -ar #hart. 2. ?ine #hart. 3. #andlestick #hart. 4. *oint and 4i/ure #harts 1) Bar #harts ) The hi/hs and lows o a orei/n currency are $lotted in a dia/ram and the $oints are 8oined with 0ertical lines HbarsG. & small horiBontal tick to the let denotes the o$enin/ le0el while a small horiBontal tick to the ri/ht re$resents the closin/ $rice o each inter0al. !" 2G ?ine #hart. It /i0es the detailed inormation about e0ery as$ect. The e9chan/e rates or each time $eriod are $lotted in a dia/ram and the $oints are 8oined. *rices on the y<a9is1 time on the 9<a9is. The line chart chooses or e9am$le the closin/ $rice o consecuti0e time $eriods1 but can also work with daily1 oicial i9in/s. !# The relati0ely easy handlin/ o line charts is a /reat ad0anta/e. ?ine charts do not show $rice mo0ements within a time $eriod. This can be a $roblem because im$ortant inormation or e9chan/e rate analysis can be lost. This *roblem was remedied with the de0elo$ment o bar charts that re$resent a more so$histicated orm o line chart. 3G #andlestick #hart. & candlestick is black i the closin/ $rice is lower than the o$enin/ $rice. & candlestick is white i the closin/ $rice is hi/her than the o$enin/ $rice. !! !3 In the 1"00s1 the Ca$anese de0elo$ed a method o technical analysis to analyBe the $rice o rice contracts. This techni3ue is called candlestick chartin/. ,te0en =ison is credited with $o$ulariBin/ candlestick chartin/ and has become reco/niBed as the leadin/ e9$ert on their inter$retation. #andlestick charts dis$lay the o$en1 hi/h1 low1 and closin/ $rices in a ormat similar to a modern<day bar chart1 but in a manner that e9tenuates the relationshi$ between the o$enin/ and closin/ $rices. #andlestick #harts are sim$ly a new way o lookin/ at $rices1 they donEt in0ol0e any calculations. -ecause candlesticks dis$lay the relationshi$ between the o$en1 hi/h1 low1 and closin/ $rices1 they cannot be dis$layed on securities that only ha0e closin/ $rices1 nor were they intended to be dis$layed on securities that lack o$enin/ $rices. The inter$retation o candlestick charts is based $rimarily on $atterns. The most $o$ular $atterns are e9$lained below. Bullish &atterns 7@ ong 6hite ?em2ty@ line% This is a bullish line. It occurs when $rices o$en near the low and close si/niicantly hi/her near the $eriodEs hi/h. !4 8@ ,ammer% This is a bullish line i it occurs ater a si/niicant downtrend. I the line occurs ater a si/niicant u$<trend1 it is called a 5an/in/ >an. & 5ammer is identiied by a small real body Hi.e.1 a small ran/e between the o$en and closin/ $ricesG and a lon/ lower shadow Hi.e.1 the low is si/niicantly lower than the o$en1 hi/h1 and loseG. The body can be em$ty or illed<in. 9@ &iercing line% This is a bullish $attern and the o$$osite o a dark cloud co0er. The irst line is a lon/ black line and the second line is a lon/ white line. The second line o$ens lower than the irst lineEs low1 but it closes more than halway abo0e the irst lineEs real body. !5 :@ Bullish engulfing lines% This $attern is stron/ly bullish i it occurs ater a si/niicant downtrend Hi.e.1 it acts as a re0ersal $atternG. It occurs when a small bearish Hilled<inG line is en/uled by a lar/e bullish Hem$tyG line. ;@ Morning star% This is a bullish $attern si/niyin/ a $otential bottom. The IstarI indicates a $ossible re0ersal and the bullish Hem$tyG line conirms this. The star can be em$ty or illed<in. !6 <@ Bullish doAi star% & IstarI indicates a re0ersal and a do8i indicates indecision. Thus1 this $attern usually indicates a re0ersal ollowin/ an indecisi0e $eriod. @ou should wait or a conirmation He./.1 as in the mornin/ star1 abo0eG beore tradin/ a do8i star. The irst line can be em$ty or illed in. Bearish &atterns !7 7@ ong black ?filled*in@ line% This is a bearish line. It occurs when $rices o$en near the hi/h and close si/niicantly lower near the $eriodEs low. 8@ ,anging Man% These lines are bearish i they occur ater a si/niicant u$trend. I this $attern occurs ater a si/niicant downtrend1 it is called a 5ammer. They are identiied by small real bodies Hi.e.1 a small ran/e between the o$en and closin/ $ricesG and a lon/ lower shadow Hi.e.1 the low was si/niicantly lower than the o$en1 hi/h1 and closeG. The bodies can be em$ty or illed<in. !8 9@ Dark cloud cover% This is a bearish $attern. The $attern is more si/niicant i the second lineEs body is below the centre o the $re0ious lineEs body Has illustratedG. :@ Bearish engulfing lines% This $attern is stron/ly bearish i it occurs ater a si/niicant u$trend Hi.e.1 it acts as a re0ersal $atternG. It occurs when a small bullish Hem$tyG line is en/uled by a lar/e bearish Hilled<inG line. !9 ;@ !vening star% This is a bearish $attern si/niyin/ a $otential to$. The IstarI indicates a $ossible re0ersal and the bearish Hilled<inG line conirms this. The star can be em$ty or illed in. <@ DoAi star% & star indicates a re0ersal and a do8i indicates indecision. Thus1 this $attern usually indicates a re0ersal ollowin/ an indecisi0e $eriod. @ou should wait or a conirmation He./.1 as in the e0enin/ star illustrationG beore tradin/ a do8i star. 3" B@ Shooting star% This $attern su//ests a minor re0ersal when it a$$ears ater a rally. The starEs body must a$$ear near the low $rice and the line should ha0e a lon/ u$$er shadow. 'eversal &atterns 7@ ong*legged doAi% This line oten si/niies a turnin/ $oint. It occurs when the o$en and close are the same1 and the ran/e between the hi/h and low is relati0ely lar/e. 3# 8@ Dragon*fly doAi% This line also si/niies a turnin/ $oint. It occurs when the o$en and close are the same1 and the low is si/niicantly lower than the o$en1 hi/h1 and closin/ $rices. 9@ (ravestone doAi% This line also si/niies a turnin/ $oint. It occurs when the o$en1 close1 and low are the same1 and the hi/h is si/niicantly hi/her than the o$en1 low1 and closin/ $rices. 3! :@ Star% ,tars indicate re0ersals. & star is a line with a small real body that occurs ater a line with a much lar/er real body1 where the real bodies do not o0erla$. The shadows may o0erla$. ;@ DoAi star% & star indicates a re0ersal and a do8i indicates indecision. Thus1 this $attern usually indicates a re0ersal ollowin/ an indecisi0e $eriod. @ou should wait or a conirmation He./.1 as in the e0enin/ star illustrationG beore tradin/ a do8i star. $eutral &atterns 33 7@ S2inning to2s% These are neutral lines. They occur when the distance between the hi/h and low1 and the distance between the o$en and close1 are relati0ely small. 8@ DoAi% This line im$lies indecision. The security o$ened and closed at the same $rice. These lines can a$$ear in se0eral dierent $atterns. Double do8i lines Htwo ad8acent do8i linesG im$ly that a orceul mo0e will ollow a breakout rom the current indecision. 34 :@ &oint And Figure #harts The $oint and i/ure chart is not well known or used by the a0era/e in0estor but it has had a lon/ history o use datin/ back to the irst technical traders. This ty$e o chart relects $rice mo0ements and is not as concerned about time and 0olume in the ormulation o the $oints. The $oint and i/ure chart remo0es the noise1 or insi/niicant $rice mo0ements1 in the stock1 which can distort tradersE 0iews o the $rice trends. These ty$es o charts also try to neutraliBe the skewin/ eect that time has on chart analysis. 'hen irst lookin/ at a $oint and i/ure chart1 you will notice a series o Js and 6s. The Js re$resent u$ward $rice trends and the 6s re$resent downward $rice trends. There are also numbers and letters in the chartA 35 these re$resent months1 and /i0e in0estors an idea o the date. 7ach bo9 on the chart re$resents the $rice scale1 which ad8usts de$endin/ on the $rice o the stock: the hi/her the stockEs $rice the more each bo9 re$resents. 6n most charts where the $rice is between K20 and K1001 a bo9 re$resents K11 or 1 $oint or the stock. The other critical $oint o a $oint and i/ure chart is the re0ersal criteria. This is usually set at three but it can also be set accordin/ to the chartistEs discretion. The re0ersal criteria set how much the $rice has to mo0e away rom the hi/h or low in the $rice trend to create a new trend or1 in other words1 how much the $rice has to mo0e in order or a column o Js to become a column o 6s1 or 0ice 0ersa. 'hen the $rice trend has mo0ed rom one trend to another1 it shits to the ri/ht1 si/nallin/ a trend chan/e. Summary of charts 36 37 T'!$DS I$ T!#,$I#A A$A.SIS The Use of Trends 6ne o the most im$ortant conce$ts in technical analysis is that o trend. The meanin/ in inance isnEt all that dierent rom the /eneral deinition o the term < a trend is really nothin/ more than the /eneral direction in which a security or market is headed. Take a look at the chart below: Isn;t it hard to see that the trend is u$L 5owe0er1 itEs not always this easy to see a trend: 38 There are lots o u$s and downs in this chart1 but there isnEt a clear indication o which direction this security is headed. A More Formal Definition Fnortunately1 trends are not always easy to see. In other words1 deinin/ a trend /oes well beyond the ob0ious. In any /i0en chart1 you will $robably notice that $rices do not tend to mo0e in a strai/ht line in any direction1 but rather in a series o hi/hs and lows. In technical analysis1 it is the mo0ement o the hi/hs and lows that constitutes a trend. 4or e9am$le1 an u$trend is classiied as a series o hi/her hi/hs and hi/her lows1 while a downtrend is one o lower lows and lower hi/hs. 39 It is an e9am$le o an u$trend. *oint 2 in the chart is the irst hi/h1 which is determined ater the $rice alls rom this $oint. *oint 3 is the low that is established as the $rice alls rom the hi/h. 4or this to remain an u$trend each successi0e low must not all below the $re0ious lowest $oint or the trend is deemed a re0ersal. Ty2es of Trend There are three ty$es o trend: 1. F$trend 2. Downtrend 3. ,ideways/5oriBontal Trends &s the names im$ly1 when each successi0e $eak and trou/h is hi/her1 itEs reerred to as an u$ward trend. I the $eaks and trou/hs are /ettin/ lower1 itEs a downtrend. 'hen there is little mo0ement u$ or down 4" in the $eaks and trou/hs1 itEs a sideways or horiBontal trend. I you want to /et really technical1 you mi/ht e0en say that a sideways trend is actually not a trend on its own1 but a lack o a well<deined trend in either direction. In any case1 the market can really only trend in these three ways: u$1 down or nowhere. Trend engths &lon/ with these three trend directions1 there are three trend classiications. & trend o any direction can be classiied as a lon/< term trend1 intermediate trend or a short<term trend. In terms o the stock market1 a ma8or trend is /enerally cate/oriBed as one lastin/ lon/er than a year. &n intermediate trend is considered to last between one and three months and a near<term trend is anythin/ less than a month. & lon/<term trend is com$osed o se0eral intermediate trends1 which oten mo0e a/ainst the direction o the ma8or trend. I the ma8or trend is u$ward and there is a downward correction in $rice mo0ement ollowed by a continuation o the u$trend1 the correction is considered to be an intermediate trend. The short<term trends are com$onents o both ma8or and intermediate trends. Take a look a 4i/ure 4 to /et a sense o how these three trend len/ths mi/ht look. 4# 'hen analyBin/ trends1 it is im$ortant that the chart is constructed to best relect the ty$e o trend bein/ analyBed. To hel$ identiy lon/<term trends1 weekly charts or daily charts s$annin/ a i0e<year $eriod are used by chartists to /et a better idea o the lon/<term trend. Daily data charts are best used when analyBin/ both intermediate and short<term trends. It is also im$ortant to remember that the lon/er the trend1 the more im$ortant it isA or e9am$le1 a one<month trend is not as si/niicant as a i0e<year trend. Trend ines & trend line is a sim$le chartin/ techni3ue that adds a line to a chart to re$resent the trend in the market or a stock. Drawin/ a 4! trend line is as sim$le as drawin/ a strai/ht line that ollows a /eneral trend. These lines are used to clearly show the trend and are also used in the identiication o trend re0ersals. &n u$ward trend line is drawn at the lows o an u$ward trend. This line re$resents the su$$ort the stock has e0ery time it mo0es rom a hi/h to a low. =otice how the $rice is $ro$$ed u$ by this su$$ort. This ty$e o trend line hel$s traders to antici$ate the $oint at which a stockEs $rice will be/in mo0in/ u$wards a/ain. ,imilarly1 a downward trend line is drawn at the hi/hs o the downward trend. This line re$resents the resistance le0el that a stock aces e0ery time the $rice mo0es rom a low to a hi/h. 43 #hannels & channel1 or channel lines1 is the addition o two $arallel trend lines that act as stron/ areas o su$$ort and resistance. The u$$er trend line connects a series o hi/hs1 while the lower trend line connects a series o lows. & channel can slo$e u$ward1 downward or sideways but1 re/ardless o the direction1 the inter$retation remains the same. Traders will e9$ect a /i0en security to trade between the two le0els o su$$ort and resistance until it breaks beyond one o the le0els1 in which case traders can e9$ect a shar$ mo0e in the direction o the break. &lon/ with clearly dis$layin/ the trend1 channels are mainly used to illustrate im$ortant areas o su$$ort and resistance. 44 & descendin/ channel on a stock chartA the u$$er trend line has been $laced on the hi/hs and the lower trend line is on the lows. The $rice has bounced o o these lines se0eral times1 and has remained ran/e<bound or se0eral months. &s lon/ as the $rice does not all below the lower line or mo0e beyond the u$$er resistance1 the ran/e<bound downtrend is e9$ected to continue. The Im2ortance of Trend It is im$ortant to be able to understand and identiy trends so that you can trade with rather than a/ainst them. Two im$ortant sayin/s in technical analysis are Ithe trend is your riendI and IdonEt buck the trend1I illustratin/ how im$ortant trend analysis is or technical traders IM&"'TA$#! "F >"UM!)* +hat Is >olume/ (olume is sim$ly the number o shares or contracts that trade o0er a /i0en $eriod o time1 usually a day. The hi/her the 0olume the more acti0e the security. To determine the mo0ement o 45 the 0olume Hu$ or downG1 chartists look at the 0olume bars that can usually be ound at the bottom o any chart. (olume bars illustrate how many shares ha0e traded $er $eriod and show trends in the same way that $rices do. +hy >olume Is Im2ortant/ (olume is an im$ortant as$ect o technical analysis because it is used to conirm trends and chart $atterns. &ny $rice mo0ement u$ or down with relati0ely hi/h 0olume is seen as a stron/er1 more rele0ant mo0e than a similar mo0e with weak 0olume. ,ay1 or e9am$le1 that a stock 8um$s 5M in one tradin/ day ater bein/ in a lon/ downtrend. Is this a si/n o a trend re0ersalL 46 This is where 0olume hel$s traders. I 0olume is hi/h durin/ the day relati0e to the a0era/e daily 0olume1 it is a si/n that the re0ersal is $robably or real. 6n the other hand1 i the 0olume is below a0era/e1 there may not be enou/h con0iction to su$$ort a true trend re0ersal. (olume should mo0e with the trend. I $rices are mo0in/ in an u$ward trend1 0olume should increase Hand 0ice 0ersaG. I the $re0ious relationshi$ between 0olume and $rice mo0ements starts to deteriorate1 it is usually a si/n o weakness in the trend. 4or e9am$le1 i the stock is in an u$trend but the u$ tradin/ days are marked with lower 0olume1 it is a si/n that the trend is startin/ to lose its le/s and may soon end. 'hen 0olume tells a dierent story1 it is a case o di0er/ence1 which reers to a contradiction between two dierent indicators. The sim$lest e9am$le o di0er/ence is a clear u$ward trend on declinin/ 0olume. >olume and #hart &atterns The other use o 0olume is to conirm chart $atterns. *atterns such as head and shoulders1 trian/les1 la/s and other $rice $atterns can be conirmed with 0olume1 a $rocess which weEll describe in more detail later in this tutorial. In most chart $atterns1 there are se0eral $i0otal $oints that are 0ital to what the chart is 47 able to con0ey to chartists. -asically1 i the 0olume is not there to conirm the $i0otal moments o a chart $attern1 the 3uality o the si/nal ormed by the $attern is weakened. >olume &recedes &rice ¬her im$ortant idea in technical analysis is that $rice is $receded by 0olume. (olume is closely monitored by technicians and chartists to orm ideas on u$comin/ trend re0ersals. I 0olume is startin/ to decrease in an u$trend1 it is usually a si/n that the u$ward run is about to end. =ow that we ha0e a better understandin/ o some o the im$ortant actors o technical analysis1 we can mo0e on to charts1 which hel$ to identiy tradin/ o$$ortunities in $rices mo0ements. #,A'T &ATT!'$S)* & chart $attern is a distinct ormation on a stock chart that creates a tradin/ si/nal1 or a si/n o uture $rice mo0ements. #hartists use these $atterns to identiy current trends and trend re0ersals and to tri//er buy and sell si/nals. In the irst section o this tutorial1 we talked about the three assum$tions o technical analysis1 the third o which was that in technical analysis1 history re$eats itsel. The theory behind chart $atterns is based 48 on this assum$tion. The idea is that certain $atterns are seen many times1 and that these $atterns si/nal a certain hi/h $robability mo0e in a stock. -ased on the historic trend o a chart $attern settin/ u$ a certain $rice mo0ement1 chartists look or these *atterns to identiy tradin/ o$$ortunities. 'hile there are /eneral ideas and com$onents to e0ery chart $attern1 there is no chart $attern that will tell you with 100M certainty where a security is headed. This creates some leeway and debate as to what a /ood $attern looks like1 and is a ma8or reason why chartin/ is oten seen as more o an art than a science. There are two ty$es o $atterns within this area o technical analysis1 re0ersal and continuation. & re0ersal $attern si/nals that a $rior trend will re0erse u$on com$letion o the $attern. & continuation $attern1 on the other hand1 si/nals that a trend will continue once the $attern is com$lete. These $atterns can be ound o0er charts o any timerame. In this section1 we will re0iew some o the more $o$ular chart $atterns. 7% ,ead And Shoulders This is one o the most $o$ular and reliable chart $atterns in technical analysis. 5ead and shoulders is a re0ersal chart $attern that 49 when ormed1 si/nals that the security is likely to mo0e a/ainst the $re0ious trend. &s you can see1 there are two 0ersions o the head and shoulders chart $attern. 5ead and shoulders to$ Hshown on the letG is a chart $attern that is ormed at the hi/h o an u$ward mo0ement and si/nals that the u$ward trend is about to end. 5ead and shoulders bottom1 also known as in0erse head and shoulders Hshown on the ri/htG is the lesser known o the two1 but is used to si/nal a re0ersal in a downtrend. CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC CCC 5" -oth o these head and shoulders $atterns are similar in that there are our main $arts: two shoulders1 a head and a neckline. &lso1 each indi0idual head and shoulder is com$rised o a hi/h and a low. 4or e9am$le1 in the head and shoulders to$ ima/e shown on the let side1 the let shoulder is made u$ o a hi/h ollowed by a low. In this $attern1 the neckline is a le0el o su$$ort or resistance. Nemember that an u$ward trend is a $eriod o successi0e risin/ hi/hs and risin/ lows. The head and shoulders chart $attern1 thereore1 illustrates a weakenin/ in a trend by showin/ the deterioration in the successi0e mo0ements o the hi/hs and lows. 8% #u2 and ,andle a cu$ and handle chart is a bullish continuation $attern in which the 5# u$ward trend has $aused but will continue in an u$ward direction once the $attern is conirmed. The $rice $attern orms what looks like a cu$1 which is $receded by an u$ward trend. The handle ollows the cu$ ormation and is ormed by a /enerally downward/sideways mo0ement in the securityEs $rice. 6nce the $rice mo0ement $ushes abo0e the resistance lines ormed in the handle1 the u$ward trend can continue. 9% Double To2s and Bottoms This chart $attern is another well<known $attern that si/nals a trend re0ersal < it is considered to be one o the most reliable and is commonly used. These $atterns are ormed ater a sustained trend and si/nal to chartists that the trend is about to re0erse. The $attern is created when a 5! $rice mo0ement tests su$$ort or resistance le0els twice and is unable to break throu/h. This $attern is oten used to si/nal intermediate and lon/< term trend re0ersals.
A double to2 2attern is sho6n on the leftD 6hile a double bottom 2attern is sho6n on the right% In the case o the double to$ $attern1 the $rice mo0ement has twice tried to mo0e abo0e a certain $rice le0el. &ter two unsuccessul attem$ts at $ushin/ the $rice hi/her1 the trend re0erses and the $rice heads lower. In the case o a double bottom Hshown on the ri/htG1 the $rice mo0ement has tried to /o lower twice1 but has ound su$$ort each time. &ter the second bounce o o the su$$ort1 the security enters a new trend and heads u$ward. :% Triangles 53 Trian/les are some o the most well<known chart $atterns used in technical analysis. The three ty$es o trian/les1 which 0ary in construct and im$lication1 are the symmetrical trian/le1 ascendin/ and descendin/ trian/le. These chart $atterns are considered to last anywhere rom a cou$le o weeks to se0eral months. The symmetrical is a $attern in which two trend lines con0er/e toward each other. This $attern is neutral in that a breakout to the u$side or downside is a conirmation o a trend in that direction. In an ascendin/ trian/le1 the u$$er trend line is lat1 while the bottom trend line is u$ward slo$in/. This is /enerally thou/ht o as a bullish $attern in which chartists look or an u$side breakout. In a descendin/ trian/le1 the lower trend line 54 is lat and the u$$er trend line is descendin/. This is /enerally seen as a bearish $attern where chartists look or a downside breakout. ;% Flag and &ennants These two short<term chart $atterns are continuation $atterns that are ormed when there is a shar$ $rice mo0ement ollowed by a /enerally sideways $rice mo0ement. This $attern is then com$leted u$on another shar$ $rice mo0ement in the same direction as the mo0e that started the trend. The $atterns are /enerally thou/ht to last rom one to three weeks. There is little dierence between a $ennant and a la/. The main dierence between these $rice mo0ements can be seen in the middle section o the chart $attern. In a $ennant1 the middle section is characteriBed by con0er/in/ trend lines1 much like what is seen in a symmetrical trian/le. The middle section on the la/ $attern1 on the other hand1 shows a channel $attern1 with no con0er/ence between the trend 55 lines. In both cases1 the trend is e9$ected to continue when the $rice mo0es abo0e the u$$er trend line <% Tri2le To2s and Bottoms Tri$le to$s and tri$le bottoms are another ty$e o re0ersal chart $attern in chart analysis. These are not as $re0alent in charts as head and shoulders and double to$s and bottoms1 but they act in a similar ashion. These two chart $atterns are ormed when the $rice mo0ement tests a le0el o su$$ort or resistance three times and is unable to break throu/hA this si/nals a re0ersal o the $rior trend. #onusion can orm with tri$le to$s and bottoms durin/ the ormation o the $attern because they can look similar to other chart $atterns. &ter the irst two su$$ort/resistance tests are ormed in the $rice mo0ement1 the $attern will look like a double to$ or bottom1 which could lead a chartist to enter a re0ersal $osition too soon. 56 B% 'ounding Bottom a roundin/ bottom1 also reerred to as a saucer bottom1 is a lon/<term re0ersal $attern that si/nals a shit rom a downward trend to an u$ward trend. This $attern is traditionally thou/ht to last anywhere rom se0eral >onths to se0eral years. & roundin/ bottom chart $attern looks similar to a cu$ and handle $attern but without the handle. The lon/<term nature o this $attern and the lack o a conirmation tri//er1 such as the handle in the cu$ and handle1 make it a diicult $attern. SU&&"'T A$D '!SISTA$#!)* 57 6nce you understand the conce$t o a trend1 the ne9t ma8or conce$t is that o su$$ort and resistance. @ouEll oten hear technical analysts talk about the on/oin/ battle between the bulls and the bears1 or the stru//le between buyers HdemandG and sellers Hsu$$lyG. This is re0ealed by the $rices a security seldom mo0es abo0e HresistanceG or below Hsu$$ortG. ,u$$ort is the $rice le0el throu/h which a stock or market seldom alls Hillustrated by the blue arrowsG. Nesistance1 on the other hand1 is the $rice le0el that a stock or market seldom sur$asses Hillustrated by the Ned &rrowsG. These su$$ort and resistance le0els are seen as im$ortant in terms o market $sycholo/y and su$$ly and demand. ,u$$ort and resistance 58 le0els are the le0els at which a lot o traders are willin/ to buy the stock Hin the case o a su$$ortG or sell it Hin the case o resistanceG. 'hen these trend lines are broken1 the su$$ly and demand and the $sycholo/y behind the stockEs mo0ements is thou/ht to ha0e shited1 in which case new le0els o su$$ort and resistance likely be established. 'ole 'eversal 6nce a resistance or su$$ort le0el is broken1 its role is re0ersed. I the $rice alls below a su$$ort le0el1 that le0el will become resistance. I the $rice rises abo0e a resistance le0el1 it will oten become su$$ort. &s the $rice mo0es $ast a le0el o su$$ort or resistance1 it is thou/ht that su$$ly and demand has shited1 causin/ the breached le0el to re0erse its role. 4or a true re0ersal to occur1 howe0er1 it is im$ortant that the $rice make a stron/ mo0e throu/h either the su$$ort or resistance. For eEam2leD as you can see1 the dotted line is shown as a le0el o resistance that has $re0ented the $rice rom headin/ hi/her on two $re0ious occasions H*oints 1 and 2G. 5owe0er1 once the resistance 59 is broken1 it becomes a le0el o su$$ort Hshown by *oints 3 and 4G by $ro$$in/ u$ the $rice and $re0entin/ it rom headin/ lower a/ain. >any traders who be/in usin/ technical analysis ind this conce$t hard to belie0e and donEt realiBe that this $henomenon occurs rather re3uently1 e0en with some o the most well<known com$anies. 4or e9am$le1 this $henomenon is e0ident on the 'al<>art ,tores Inc. H'>TG chart between 2003 and 200". =otice how the role o the K51 le0el chan/es rom a stron/ le0el o su$$ort to a le0el o resistance. In almost e0ery case1 a stock will ha0e both a le0el o su$$ort and a le0el o resistance and will trade in this ran/e as it bounces between these le0els. The Im2ortance of Su22ort and 'esistance 6" ,u$$ort and resistance analysis is an im$ortant $art o trends because it can be used to make tradin/ decisions and identiy when a trend is re0ersin/. ,u$$ort and resistance le0els both test and conirm trends and need to be monitored by anyone who uses technical analysis. &s lon/ as the $rice o the share remains between these le0els o su$$ort and resistance1 the trend is likely to continue. It is im$ortant to note1 howe0er1 that a break beyond a le0el o su$$ort or resistance does not always ha0e to be a re0ersal. 4or e9am$le1 i $rices mo0ed abo0e the resistance le0els o an u$ward trendin/ channel1 the trend ha0e accelerated1 not re0ersed. This means that the $rice a$$reciation is e9$ected to be aster than it was in the channel. -ein/ aware o these im$ortant su$$ort and resistance $oints should aect the way that you trade a stock. Traders should a0oid $lacin/ orders at these ma8or $oints1 as the area around them is usually marked by a lot o 0olatility. I you eel conident about makin/ a trade near a su$$ort or resistance le0el1 it is im$ortant that you ollow this sim$le rule: do not $lace orders directly at the su$$ort or resistance le0el. This is because in many cases1 the $rice ne0er actually reaches the whole number1 but lirts with it instead. ,o i youEre bullish on a stock that is mo0in/ toward an 6# im$ortant su$$ort le0el1 do not $lace the trade at the su$$ort le0el. Instead1 $lace it abo0e the su$$ort le0el1 but within a ew $oints. 6n the other hand1 i you are $lacin/ sto$s or short sellin/1 set u$ your trade $rice at or below the le0el o su$$ort. M">I$( A>!'A(!S)* >ost chart $atterns show a lot o 0ariation in $rice mo0ement. This can make it diicult or traders to /et an idea o a securityEs o0erall trend. 6ne sim$le method traders use to combat this is to a$$ly mo0in/ a0era/es. & mo0in/ a0era/e is the a0era/e $rice o a security o0er a set amount o time. -y $lottin/ a securityEs a0era/e $rice1 the $rice mo0ement is smoothed out. 6nce the day<to<day luctuations are remo0ed1 traders are better able to identiy the true trend and increase the $robability that it will work in their a0our. Ty2es of Moving Averages: < There are a number o dierent ty$es o mo0in/ a0era/es that 0ary in the way they are calculated1 but how each a0era/e is inter$reted remains the same. The calculations only dier in re/ards to the wei/htin/ that they $lace on the $rice data1 shitin/ rom e3ual wei/htin/ o each 6! $rice $oint to more wei/ht bein/ $laced on recent data. The three most common ty$es o mo0in/ a0era/es are sim$le1 linear and e9$onential. #. Sim2le Moving Average ?SMA@ This is the most common method used to calculate the mo0in/ a0era/e o $rices. It sim$ly takes the sum o all o the $ast closin/ $rices o0er the time $eriod and di0ides the result by the number o $rices used in the calculation. 4or e9am$le1 in a 10<day mo0in/ a0era/e1 the last 10 closin/ $rices are added to/ether and then di0ided by 10. &s you can see in 4i/ure 11 a trader is able to make the a0era/e less res$onsi0e to chan/in/ $rices by increasin/ the number o $eriods used in the calculation. Increasin/ the number o time $eriods in the calculation is one o the best ways to /au/e the stren/th o the lon/<term trend and the 63 likelihood that it will re0erse. >any indi0iduals ar/ue that the useulness o this ty$e o a0era/e is limited because each $oint in the data series has the same im$act on the result re/ardless o where it occurs in the se3uence. The critics ar/ue that the most recent data is 64 more im$ortant and1 thereore1 it should also ha0e a hi/her wei/htin/. This ty$e o criticism has been one o the main actors leadin/ to the in0ention o other orms o mo0in/ a0era/es. 8% inear +eighted Average This mo0in/ a0era/e indicator is the least common out o the three and is used to address the $roblem o the e3ual wei/htin/. The linear wei/hted mo0in/ a0era/e is calculated by takin/ the sum o all the closin/ $rices o0er a certain time $eriod and multi$lyin/ them by the $osition o the data $oint and then di0idin/ by the sum o the number o $eriods. 4or e9am$le1 in a i0e<day linear wei/hted a0era/e1 todayEs closin/ $rice is multi$lied by i0eA yesterdayEs by our and so on until the irst day in the $eriod ran/e is reached. These numbers are then added to/ether and di0ided by the sum o the multi$liers. 9% !E2onential Moving Average ?!MA@ This mo0in/ a0era/e calculation uses a smoothin/ actor to $lace a hi/her wei/ht on recent data $oints and is re/arded as much more eicient than the linear wei/hted a0era/e. 5a0in/ an understandin/ o the 65 calculation is not /enerally re3uired or most traders because most chartin/ $acka/es do the calculation or you. The most im$ortant thin/ to remember about the e9$onential mo0in/ a0era/e is that it is more res$onsi0e to new inormation relati0e to the sim$le mo0in/ a0era/e. This res$onsi0eness is one o the key actors o why this is the mo0in/ a0era/e o choice amon/ many technical traders. & 15<$eriod 7>& raises and alls aster than a 15<$eriod ,>&. This sli/ht dierence doesn;t seem like much1 but it is an im$ortant actor to be aware o since it can aect returns. MaAor Uses of Moving Averages >o0in/ a0era/es are used to identiy current trends and trend re0ersals as well as to set u$ su$$ort and resistance le0els. >o0in/ a0era/es can be used to 3uickly identiy whether a security is mo0in/ in an u$trend or a downtrend de$endin/ on the direction o the mo0in/ a0era/e. 'hen a mo0in/ a0era/e is headin/ u$ward and the $rice is 66 abo0e it1 the security is in an u$trend. #on0ersely1 a downward slo$in/ mo0in/ a0era/e with the $rice below can be used to si/nal a downtrend. ¬her method o determinin/ momentum is to look at the order o a $air o mo0in/ a0era/es. 'hen a short<term a0era/e is abo0e a lon/er< term a0era/e1 the trend is u$. 6n the other hand1 a lon/<term a0era/e abo0e a shorter<term a0era/e si/nals a downward mo0ement in the trend. >o0in/ a0era/e trend re0ersals are ormed in two main ways: when the $rice mo0es throu/h a mo0in/ a0era/e and when it mo0es throu/h mo0in/ a0era/e crosso0ers. The irst common si/nal is when the $rice mo0es throu/h an im$ortant mo0in/ a0era/e. 4or e9am$le1 when the $rice o a security that was in an u$trend alls below a 50<$eriod mo0in/ a0era/e1 it is a si/n that the u$trend may be re0ersin/. 67 The other si/nal o a trend re0ersal is when one mo0in/ a0era/e crosses throu/h another. 4or e9am$le1 i the 15<day mo0in/ a0era/e crosses abo0e the 50<day mo0in/ a0era/e1 it is a $ositi0e si/n that the $rice will start to increase. 68 I the $eriods used in the calculation are relati0ely short1 or e9am$le 15 and 351 this could si/nal a short<term trend re0ersal. 6n the other hand1 when two a0era/es with relati0ely lon/ time rames cross o0er H50 and 2001 or e9am$leG1 this is used to su//est a lon/<term shit in trend. ¬her ma8or way mo0in/ a0era/es are used is to identiy su$$ort and resistance le0els. It is not uncommon to see a stock that has been allin/ sto$ its decline and re0erse direction once it hits the su$$ort o a ma8or mo0in/ a0era/e. & mo0e throu/h a ma8or mo0in/ a0era/e is oten used as a si/nal by technical traders that the trend is re0ersin/. 4or e9am$le1 i the $rice breaks throu/h the 200<day mo0in/ a0era/e in a downward direction1 it is a si/nal that the u$trend is re0ersin/. 69 >o0in/ a0era/es are a $owerul tool or analyBin/ the trend in a security. They $ro0ide useul su$$ort and resistance $oints and are 0ery easy to use. The most common time rames that are used when creatin/ mo0in/ a0era/es are the 200<day1 100<day1 50<day1 20<day and 10<day. The 200< day a0era/e is thou/ht to be a /ood measure o a tradin/ year1 a 100<day a0era/e o a hal a year1 a 50<day a0era/e o a 3uarter o a year1 a 20<day a0era/e o a month &nd 10 O day a0era/e o two weeks. >o0in/ a0era/es hel$ technical traders smooth out some o the noise that is ound in day<to<day $rice mo0ements1 /i0in/ traders a clearer 0iew o the $rice trend. ,o ar we ha0e been ocused on $rice mo0ement1 throu/h charts and a0era/es. In the ne9t section1 weEll look at some other techni3ues used to conirm $rice mo0ement and $atterns. Technical Indicators 7" B"I$(!' BA$DS "vervie6 -ollin/er -ands are similar to mo0in/ a0era/e en0elo$es. The dierence between -ollin/er -ands and en0elo$es is en0elo$es are $lotted at a i9ed $ercenta/e abo0e and below a mo0in/ a0era/e1 whereas -ollin/er -ands are $lotted at standard de0iation le0els abo0e and below a mo0in/ a0era/e. ,ince standard de0iation is a measure o 0olatility1 the bands are sel<ad8ustin/: widenin/ durin/ 0olatile markets and contractin/ durin/ calmer $eriods. -ollin/er -ands were created by Cohn -ollin/er. Inter2retation -ollin/er -ands are usually dis$layed on to$ o security $rices1 but they can be dis$layed on an indicator. These comments reer to bands dis$layed on $rices. &s with mo0in/ a0era/e en0elo$es1 the basic inter$retation o -ollin/er -ands is that $rices tend to stay within the u$$er< and lower<band. The distincti0e characteristic o -ollin/er -ands is that the s$acin/ between the bands 0aries based on the 0olatility o the $rices. Durin/ $eriods o e9treme $rice chan/es Hi.e.1 hi/h 0olatilityG1 the bands widen to become more or/i0in/. Durin/ $eriods o sta/nant $ricin/ Hi.e.1 low 0olatilityG1 the bands =arrow to contain $rices. 7# 4ollowin/ are characteristics o -ollin/er -ands. P ,har$ $rice chan/es tend to occur ater the bands ti/hten1 as 0olatility lessens. P 'hen $rices mo0e outside the bands1 a continuation o the current trend is im$lied P -ottoms and to$s made outside the bands ollowed by bottoms and to$s made inside the bands call or re0ersals in the trend. P & mo0e that ori/inates at one band tends to /o all the way to the other band. This obser0ation is useul when $ro8ectin/ $rice tar/ets. MA#D "vervie6 The >&#D HI>o0in/ &0era/e #on0er/ence/Di0er/enceIG is a trend ollowin/ momentum indicator that shows the relationshi$ between two mo0in/ a0era/es o $rices. The >&#D was de0elo$ed by 2erald &$$el1 $ublisher o ,ystems and 4orecasts. The >&#D is the dierence between a 2"<day and 12<day e9$onential mo0in/ a0era/e. & )<day e9$onential mo0in/ a0era/e1 called the Isi/nalI Hor Itri//erIG line is $lotted on to$ o the >&#D to show buy/sell o$$ortunities. H&$$le s$eciies e9$onential mo0in/ a0era/es as $ercenta/es. Thus1 he reers to these three mo0in/ a0era/es as %.5M1 15 7! and 20M res$ecti0ely.G Inter2retation The >&#D $ro0es most eecti0e in wide<swin/in/ tradin/ markets. There are three $o$ular ways to use the >&#D: crosso0ers1 o0erbou/ht/o0ersold conditions1 and di0er/ences. #rossovers The basic >&#D tradin/ rule is to sell when the >&#D alls below its si/nal line. ,imilarly1 a buy si/nal occurs when the >&#D rises abo0e its si/nal line. It is also $o$ular to buy/sell when the >&#D /oes abo0e/below Bero. "verbought="versold #onditions The >&#D is also useul as an o0erbou/ht/o0ersold indicator. 'hen the shorter mo0in/ a0era/e $ulls away dramatically rom the lon/er mo0in/ a0era/e Hi.e.1 the >&#D risesG1 it is likely that the security $rice is o0ere9tendin/ and will soon return to more realistic le0els. >&#D o0erbou/ht and o0ersold conditions e9ist 0ary rom security to security. Divergences 73 &n indication that an end to the current trend may be near occurs when the >&#D di0er/es rom the security. & bearish di0er/ence occurs when the >&#D is makin/ new lows while $rices ail to reach new lows. & bullish di0er/ence occurs when the >&#D is makin/ new hi/hs while $rices ail to reach new hi/hs. -oth o these di0er/ences are most si/niicant when they occur at relati0ely o0erbou/ht/o0ersold le0els. M"M!$TUM "vervie6 The >omentum indicator measures the amount that a securityEs $rice has chan/ed o0er a /i0en time s$an. Inter2retation The inter$retation o the >omentum indicator is identical to the inter$retation o the *rice N6#. -oth indicators dis$lay the rate<o< chan/e o a securityEs $rice. 5owe0er1 the *rice N6# indicator dis$lays the rate<o<chan/e as a $ercenta/e whereas the >omentum indicator dis$lays the rate<o<chan/e as a ratio. >"UM! 74 "vervie6 (olume is sim$ly the number o shares Hor contractsG traded durin/ a s$eciied time rame He./.1 hour1 day1 week1 month1 etcG. The analysis o 0olume is a basic yet 0ery im$ortant element o technical analysis. (olume $ro0ides clues as to the intensity o a /i0en $rice mo0e. Inter2retation ?ow 0olume le0els are characteristic o the indecisi0e e9$ectations that ty$ically occur durin/ consolidation $eriods Hi.e.1 $eriods where $rices mo0e sideways in a tradin/ ran/eG. ?ow 0olume also oten occurs durin/ the indecisi0e $eriod durin/ market bottoms. 5i/h 0olume le0els are characteristic o market to$s when there is a stron/ consensus that *rices will mo0e hi/her. 5i/h 0olume le0els are also 0ery common at the be/innin/ o new trends Hi.e.1 when $rices break out o a tradin/ ran/eG. Cust beore market bottoms1 0olume will oten increase due to $anic< dri0en sellin/. (olume can hel$ determine the health o an e9istin/ trend. & healthy u$< trend should ha0e hi/her 0olume on the u$ward le/s o the trend1 and lower 0olume on the downward Hcorrecti0eG le/s. & healthy downtrend usually has hi/her 0olume on the downward le/s o the trend and lower 0olume on the u$ward Hcorrecti0eG le/s. 75 'AT! "F #,A$(! ?'"#@ Nate o chan/e measures the rate at which $rices rise or all. It is based on the $rinci$le that $rices usually rise and all at the astest $ace well ahead o their $eak and beore their trou/h res$ecti0ely. 7F G Day '"# The conce$t o N6# can be e9$lained with the hel$ o a sin/le e9am$le. & ball thrown into the &ir /enerally shoots u$ with s$eed but subse3uently shows down considerably beore it turns to come down a/ain. The loss o u$ward momentum that occurs beore the ball chan/es course can be seen in the stock market also. -eore $eakin/ out1 share $rocess re/isters a noticeable decrease in momentum. T57 #&?#F?&TI6= 64 10 D&@ N&T7 64 #5&=27 D&@ ,5&N7 *NI#7 ,5&N7 *NI#7 10D&@, &26 N6# 10 D&@, &26 1 2 3 H4G QH2G/H3G 1 !"79.5 2 !"65."5 3 !#"6."5 4 !#65.! 5 !#5#.# " !#78.# % !#89.35 8 !#6" ) !#!5 10 !#97 11 !!47.95 !"79.5 #."8# 12 !343 !"65."5 #.#35 13 !4!#.35 !#"6."5 #.#5" 14 !448 !#65.! #.#3# 15 !!5!.95 !#5#.# #."47 1" !!7" !#78.# #."4! 1% !!"5.#5 !#89.35 #.""7 18 !##9 !#6" ".98# 76 1) !!!9.95 !#!5 #."49 20 !!5".5 !#97 #."!4 21 !!"6 !!47.95 ".98# 22 !!4!.! !343 ".957 23 !#67 !4!#.35 ".895 24 !#48.65 !448 ".878 25 !#5# !!5!.95 ".955 2" !!4"."5 !!7" ".987 2% !3"9.!5 !!"5.#5 #."47 28 !3!8.6 !##9 #."99 2) !357.7 !!!9.95 #."57 30 !!9! !!5".5 #."#8 The conce$t o N6# can be e9$lained with the hel$ o a sin/le e9am$le. & ball thrown into the air /enerally shoots u$ with s$eed but subse3uently shows down considerably beore it turns to come down a/ain. The loss o u$ward momentum that occurs beore the ball chan/es course can be seen in the stock market also. -eore $eakin/ out1 share $rocess re/isters a noticeable decrease in momentum. To measure the rate o chan/e1 the ratio o the most recent closin/ $rice to the $rice or a certain number o days in the $ast is worked out. To calculate a 10 days 77 N6#1 the latest closin/ $rice is di0ided by the closin/ $rice o the scri$ 10 days a/o. I the latest $rice is hi/her than that o the historical $rice or the ten $re0ious days1 the N6# 0alue will be abo0e the line 1 and 0ice 0ersa. In the ollowin/ table an e9am$le o 10 days N6# is e9$lained. Fnder column 2 the share $rice mo0ement o a com$any is $ro0ided or 20 days while under column 3 the $rices rulin/ 10 days a/o has been taken. In the last column1 the N6# 0alues are arri0ed at by di0idin/ the current day;s $rice by the $rice 10 days a/o. The N6# 0alues are a0ailable rom the 11 th day only as or the irst 10 tradin/ days. The 10 days back share $rices are not a0ailable. It is worth notin/ that the share $rices are a0ailable only on the tradin/ that actually took $lace in the market. Thereore1 the N6# is com$uted or 10 tradin/ days and not 10 calendar days. The share $rice has been increased by Ne. 1 on e0ery day tradin/ day rom day 1 to day 15. 5owe0er1 the N6# declined continuously rom the 11 th day to 15 th day1 thou/h the share $rice in ru$ees terms increased. This indicates that thou/h there was a share $rice rise in absolute terms1 in $ercenta/e terms the rise in share $rice declined durin/ that $eriod. I the N6# line is abo0e 1A the current day $rice is hi/her than that o 10 days a/o. 78 I the N6# line is abo0e 1 and risin/A the dierence between the current day $rice and 10 days back $rice /rows at an increasin/ rate Hbullish si/nalG. I N6# line is abo0e 11 but declinin/A the $rice rises at a lower rate than the earlier /rowth rate Hbearish si/nalG I the N6# line is below 11 the current day;s $rice is lower than the $rice 10 days a/o. I the N6# line is below 1 and allin/1 the dierence between 10 days $rice and 10 days back $rice /rows at a aster rate Hbearish si/nalG. I the N6# line is below 11 but risin/1 the rate o decline slows down Hbullish si/nalG. The N6# line is so constructed that it is always a ste$ ahead o the $rice mo0ement. It /i0es an ad0ance si/nal beore the share $rice line takes a re0ersal direction. 'elative Strength IndeE Nelati0e ,tren/th Inde9 HN,IG us is one o the 0ery ew so$histicated 6scillators used in technical analysis. The others which we ha0e already discussed in the $re0ious issues are stochastic and >&#D. The rate o 79 chan/e and momentum are some o the widely used sim$le oscillators. There are some laws like erratic mo0ement due to sudden dro$ or rise in the $rice mo0ement e0en in a sin/le tradin/ day in the usa/e o sim$le oscillators. 4or instance1 in a 10 day momentum1 a shar$ ad0ance or decline ten days back can cause sudden shits in momentum line e0en i there is a mar/inal or no chan/e in current $rices. Thereore1 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 $roblem in sim$le oscillators is that there is no s$eciied ran/e on 0ertical scale. >ainly to address these two ma8or $roblems o sim$le oscillators N,I was de0elo$ed by C. 'elles 'ilder1 Cr. in 1)%8. N,I indicator $ro0ides not only the re3uired smoothin/ but also 0 and 100 as lower and u$$er limits res$ecti0ely or its 0ertical scale. N,I is calculated usin/ the ollowin/ ormula. N,IQ100 O R100 / H1SN,GT 'here N, Q &0era/e o n $eriods $rice /ains &0era/e o n $eriods $rice losses % day N, 0alue Q H8/%G / H4/%G Q 1.143 / 0.5%1Q2 N,IQ 100 O R100 / H1SN,GT Q 100 O R100 / H1S2GT Q100< 33.33 Q ""."%. 8" The N,I 0alue or the se0enth day is ""."%. 4or calculatin/ the N,I 0alue or the ei/hth day1 we ha0e to e9clude the irst day closin/ $rice and include the $rice on the ei/hth day. 'e can calculate N,I or any time $eriod. The most widely used $eriod is 14 days. ,ome technical analysts also use lesser time $eriods like 5 < day1 % O day1 ) O day to /et the 3uicker si/nals. ?ike I any other 6scillators1 shorter the time $eriod1 the more sensiti0e and 0olatile the N,I becomes. Thereore1 to reduce the misleadin/ si/nals 'ilder recommended and used a 14 day $eriod or constructin/ N,I. N,I #&?#F?&TI6=
T6T&? 8 4 Inter$retation: The N,I 0alues are $lotted on chart with a 0ertical scale o 0 to 100. 8# I the N,I mo0es abo0e the 0alue %01 it is considered as o0erbou/ht. I the N,I mo0es below the 0alue 301 it is treated as an o0ersold Bone. In other words1 there may be down trends in the $rice ater the N,I mo0in/ abo0e the %0 le0el and $rices may reco0er and look u$ ater the N,I alls below 30 le0el. 2enerally1 N,I indicator crosses the %0 le0el much beore the share $rice touches the $eak. ,imilarly1 N,I line /oes below the 30 le0el well ahead o $rice litin/ the bottom. 5ence1 N,I /i0es an ad0ance si/nal or re0ersal share $rice mo0ements. 4ailure swin/s: we can see the ailure in rallies and also in declines when the N,I is abo0e %0 and 30 res$ecti0ely. 4ailure +&. in rally when the N,I rises abo0e %0 rises a/ain but ails to reach the le0el %0 and below the $rior lower le0el. This is a clear sell si/nal. 4ailure at bottom o when the N,I in a downtrend. 4ailure +-. e9$lains the ailure in decline when ails to set new low and starts an u$trend to e9ceed $re0ious $eak. Di0er/ence: &ccordin/ to 'ilder1 di0er/ence is the most indicati0e character o the N,I which /i0es a warnin/ si/nal or likely re0ersal in share mo0ement. 8! 5ence1 the di0er/ence is between the N,I line and the share $rice. 4or instance1 i the N,I line is allin/ below rom the le0el o 80 to %0 and a same time the share $rice is still in an u$trend1 it /i0es as indication that the share $rice is also likely to re0erse its direction shortly. This di0er/ence /i0es a sell si/nal. ,imilarly1 we /et a buy si/nal when the N,I line is mo0in/ u$ below the le0el 30 and at the same time the share $rice is still continuin/ in a downtrend.
The N,I indicator sim$ly means -uy1 when the N,I line is crossin/ u$ throu/h the 50 le0el and ,ell1 when the N,I line is crossin/ down throu/h the 50 le0el. 'e can also identiy the chart $atterns like trian/les1 la/s1 rectan/les in the N,I line and inter$ret the same way as in $rice chart. ,u$$ort and Nesistance le0els also can be drawn or N,I charts. These 6scillators are 3uite useul only or short terms in0estors and traders. These are not useul or lon/ term in0estors1 because they cannot sim$ly sell their shares or the sim$le reason that N,I has mo0ed abo0e the %0 le0el. The irst entry o N,I into the o0erbou/ht Bone is only a irst warnin/ si/nal. 6ne has to wait or urther conirmations beore really li3uidatin/ his $ortion 83 84 T!#,$I#A A$A.SIS "F SBI$ State Bank of India* ,istory The origin of the State Bank of India goes back to the first decade of the nineteenth century 6ith the establishment of the Bank of #alcutta in #alcutta on 8 Hune 7IF<% Three years later the bank received its charter and 6as re*designed as the Bank of Bengal ?8 Hanuary 7IFJ@% A uni0ue institutionD it 6as the first Aoint*stock bank of British India s2onsored by the (overnment of Bengal% The Bank of Bombay ?7; A2ril 7I:F@ and the Bank of Madras ?7 Huly 7I:9@ follo6ed the Bank of Bengal% These three banks remained at the a2eE of modern banking in India till their amalgamation as the Im2erial Bank of India on 8B Hanuary 7J87% 7J;; * "n 7st Huly State Bank of India 6as constituted under the State Bank of India Act 7J;;D for the 2ur2ose of taking over the undertaking and business of the Im2erial Bank of India% The Im2erial Bank of India 85 6as founded in 7J87 under the Im2erial Bank of India Act 7J8F% The Bank transacts general banking business of every descri2tion includingD foreign eEchangeD merchant banking and mutual funds% Management of * SBI $ame Designation &rati2 #haudhuri #hairman = #hair &erson A Krishna Kumar Managing Director Ashok HhunAhun6ala Director S >enkatachalam Director ( D $adaf Director &arthasarthy Iyengar Director Subir >ithal (okran Director Dee2ak Ish6arbhai Amin $on "fficial &art Time Director $ame Designation ,emant ( #ontractor Managing Director Di6akar (u2ta Managing Director Dilee2 # #hoksi Director D Sundaram Director 'ash2al Malhotra $on "fficial &art Time Director D K Mittal Director Hyoti Bhushan Moha2atra Director
86 #"$#USI"$)* Technical Analysis of State Bank of India) 9 .ears data taken ?7st*Han*8FFJ to 8B th *Feb*8F78@ Bar #hart #andle Stick #hart 87 ine #hart 88 'ate of #hange ?'"#@ 'elative Strength IndeE ?'SI@ 89 'hen 50 D>& crosses 200 D>& in F$side that time In Technical words it;s called as 26?D7= #N6,, it;s a stron/ bullish si/nal 9" &s $er charts ,-I has stron/ su$$ort U 2040 ! 1880 ! Nesistance U 21)01 23)0 ! 2450. 'hereas N,I is crossin/ u$ 50 le0el which Indicate -uy ,i/nal. and i we see 10 days N6# is abo0e 1 but declinin/ the $rice rises at lower rate than the earlier /rowth rate which indicate bearish signal% -ut i we take 3 years data and calculate N6# then we can see +N6# line is abo0e 1 and risin/A the dierence between the current day $rice and 10 days back $rice /rows at an increasin/ rate ?bullish signal@. 9# Necommendation: < -uy ,-I at current le0el i.e. 2100< 21301 ,hort term Tar/et 21)0 ! 23)01 ,to$ ?oss U 2040 ?on/ Term Tar/et abo0e 23)0 2540 and abo0e this le0el 2"00 < < 2%00 Tar/ets is there1 ,to$ ?oss U 2040 9! BIBI"('A&,. 666%investo2edia%com 666%onlincetradingconce2ts%com 666%nseindia%com 666%bseindia%com &nd 5el$ taken by my oice collea/ue >r #handrashekhar Vhamkar HNeliance ,ecuritiesG who has /ood knowled/e o technical analysis. 93