Technical Analysis

Created By:-
Pandya Ashish
Tejani Mahesh
Agenda

n Introduction
n Basic Assumptions
n Dow Theory
n Elliot Wave Theory
n Trend
n Support & Resistance
n Volume
n Chart
n Mathematical Indicators
n Conclusion
Introduction

n It is the one type of approach for Security

Analysis.
n Technicians (also known as quantitative analysts
or chartists) usually look at price, volume and
psychological indicators over time.
n They are looking for trends and patterns in the
data that indicate future price movements.
Introduction

n Technical analysis is the attempt to forecast stock prices

on the basis of market-derived data.( i.e. Demand and
Supply).
n What Is Technical Analysis?
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
Basic Assumption

n The Market Discount Everything.

n Price Moves In Trends.
n History tends to repeat itself
Basic Technical Tools

n Trend Lines
n Moving Averages
n Price Patterns
n Indicators
n Cycles
Dow Theory

n This theory was first stated by Charles Dow in a

series of columns in the WSJ between 1900 and
1902.
n Dow (and later Hamilton and Rhea) believed that
market trends forecast trends in the economy.
n A change in the trend of the DJIA must be
confirmed by a trend change in the DJTA in
order to generate a valid signal.
Dow Theory Trends (1)

n Primary Trend
¡ Called “the tide” by Dow, this is the trend that
defines the long-term direction (up to several years).
Others have called this a “secular” bull or bear
market.
n Secondary Trend
¡ Called “the waves” by Dow, this is shorter-term
departures from the primary trend (weeks to months)
n Day to day fluctuations
¡ Not significant in Dow Theory
Dow Theory Trends (2)
Does Dow Theory Work?

n According to Martin Pring, if you had invested

$44 in 1897 and followed all buy and sell
signals, by 1981 you would have accumulated
about $18,000.
n If you had simply invested $44 and held that
portfolio, by 1981 you would have accumulated
about $960.
Elliot Wave Principle (1)

n R.N. Elliot formulated this idea in a series of articles in

Financial World in 1939.
n Elliot believed that the market has a rhythmic regularity
that can be used to predict future prices.
n The Elliot Wave Principle is based on a repeating 8-wave
cycle, and each cycle is made up of similar shorter-term
cycles (“Big fleas have little fleas upon their backs to
bite 'em - little fleas have smaller fleas and so on ad
infinitem”).
n Elliot Wave adherents also make extensive use of the
Fibonacci series.
The Elliot Wave Principle (2)

B
A
C
3

4
1

2
Does Elliot Wave Work?

n Who knows? One of the biggest problems with Elliot

Wave is that no two practitioners seem to agree on the
wave count, and therefore on the prediction of what’s to
come.
n Robert Prechter (the most famous EW practitioner) made
several astoundingly correct predictions in the 1980’s,
but hasn’t been so prescient since (he no longer gets
much press attention).
n For example, in 1985 he predicted that the market would
peak in 1987 (correct), but he thought it would peak at
3686 (± 100 points).
n The DJIA actually peaked on 25 August 1987 at
2722.42, more than 960 points lower.
The Use Of Trend

n A trend is really nothing more than the general

direction in which a security or market is headed
n One of the most important concepts in technical
analysis
Types of Trends

n Uptrend
n Downtrends
n Sideways
Cont…

n Trend Length
Cont..

n Trend lines
Cont….

n Channels
n A channel, or channel lines, is the addition of
two parallel trend lines that act as strong areas of
support and resistance
The Importance of Trend

n Two important sayings in technical analysis

n 1. "the trend is your friend"
n 2. "don't buck the trend."
Support & Resistance

n Support and resistance lines

indicate likely ends of trends.
n Resistance results from the
Breakout
inability to surpass prior
highs.
n Support results from the
inability to break below to
prior lows.
n What was support becomes
resistance, and vice-versa.
Support Resistance
 Cont…
n As you can see in Figure, 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).
Cont..

n Why Does it Happen?

n 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).
Cont..

n Round Numbers and Support and Resistance

n Round numbers like 10, 20, 35, 50, 100 and
1,000 tend be important in support and resistance
levels because they often represent the major
psychological turning points at which many
traders will make buy or sell decisions.
n Importance of Support and Resistance
Volume

n What is Volume?
Volume is simply the number of shares or
contracts that trade over a given period of time,
usually a day. The higher the volume, the more
active the security.
n Why Volume is Important ?
1. It is used to confirm trends and chart patterns.
[Link] influences by higher and lower
volumes.
Volume in Chart
What Is A Chart ?

n A chart is simply a graphical representation of a

series of prices over a set time frame.
n For example, a chart may show a stock's price
movement over a one-year period, where each
point on the graph represents the closing price
for each day the stock is traded
Cont..

n Chart Properties
Time scale
The Price Scale and Price Point Properties
Types of Charts

n There are four main types of charts that are used

by investors and traders depending on the
information that they are seeking and their
individual skill levels
n [Link] Line Chart
n [Link] Bar Chart
n [Link] Candlestick Chart
n 4. The Point and Figure Chart
Line Chart
n It represents only the closing prices over a set period of
time
Bar Chart

n Each bar is composed of 4 elements: OHLC

Candlestick Chart
Point and Figure Chart

n Point & Figure charts are

independent of time.
n An X represents an up move.
n An O represents a down
move.
n The Box Size is the number of
points needed to make an X or
O. X
n The Reversal is the price X
change needed to recognize a
X XO
X XO
change in direction. XO O
n Typically, P&F charts use a 1- XO O
point box and a 3-point X
reversal.
Chart Patterns

n Head and Shoulders

n Cup and Handle
n Double Tops and Bottoms
n Triangles
n Flag and Pennant
n Wedge
n Triple Tops and Bottoms
n Rounding Bottom
Head and Shoulders
H&S Top
n This formation is Head
characterized by two
small peaks on either Left Shoulder Right Shoulder

side of a larger peak.

n This is a reversal pattern, Neckline

meaning that it signifies

H&S Bottom
a change in the trend.
Neckline

Left Shoulder Right Shoulder

Head
Cup and Handle
Double Tops and Bottoms
Double Top
n These formations are
similar to the H&S
formations, but there is
no head.
n These are reversal Target
patterns with the same Target

measuring implications
as the H&S.

Double Bottom
Triangles

n Triangles are
continuation formations.
n Three flavors: Ascending
¡ Ascending
¡ Descending Symmetrical
¡ Symmetrical
n Typically, triangles Symmetrical
should break out about
half to three-quarters of
Descending
the way through the
formation.
Flag and Pennant
Wedge

Figure 6
Triple Tops and Bottoms
Rounded Tops & Bottoms

n Rounding formations are

Rounding
characterized by a slow Bottom
reversal of trend.

Rounding Top
Mathematical Indicators

n Moving Average
1. Simple Moving Average (SMA)
2. Linear Weighted Average
3. Exponential Moving Average (EMA)
n Oscillators

[Link] Directional Index

[Link] Average Convergence
[Link] Strength Index
SMA

Figure 1
EMA

Figure 2
Average Directional Index

n The ADX is a combination of two price

movement measures: the positive directional
indicator (+DI) and the negative directional
indicator (-DI).
n The ADX measures the strength of a trend but
not the direction.
 MACD

n MACD was developed by Gerald Appel as a way to keep

track of a moving average crossover system.
n When this signal line goes from negative to positive, a
buy signal is generated.

MACD= shorter term moving average - longer term moving average

n When the signal line goes from positive to negative, a

sell signal is generated.
n MACD is best used in choppy (trendless) markets, and is
subject to whipsaws (in and out rapidly with little or no
profit).
Relative Strength Index

n . RSI helps to signal overbought and oversold

conditions in a security. Figure 3
Conclusion

n Technical traders take a short-term approach to analyzing the market

n Criticism of technical analysis stems from the efficient market
hypothesis, which states that the market price is always the correct
one, making any historical analysis useless.
n The price scale is on the right-hand side of the chart. It shows a
stock's current price and compares it to past data points. It can be
either linear or logarithmic.
n One of the most important concepts in technical analysis is that of a
trend, which is the general direction that a security is headed. There
are three types of trends: uptrend, downtrends and
sideways/horizontal trends.

• .
 Thank you for your time
n As noted, there are literally hundreds of indicators and
thousands of trading systems.
n A whole semester could easily be spent on just a handful
of these.
n To close, just note that there is nothing so crazy that
somebody doesn’t use it to trade.
n For example, many people use astrology, geometry
(Gann angles), neural networks, chaos theory, etc.
n There’s no doubt that each of these (and others) would
have made you lots of money at one time or another.
The real question is can they do it consistently?
n As the carneys used to say, “You pays your money, and
you takes your chances.”