A Study on Technical Analysis S&P NIFTY Stocks
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Transcript of A Study on Technical Analysis S&P NIFTY Stocks
EXECUTIVE SUMMARY
The project undertaken is “A Study on Technical Analysis of S&P CNX NIFTY stocks”. The
project emphasizes on Technical Analysis of stocks. The Chart patterns and indicators used as a
part of the Technical Analysis are described in detail. Further, the project also highlights the
S&P CNX NIFTY stocks’ performance. The project also provides an insight into the different
components of Securities Market in India like Primary Market, Secondary Market and Derivative
market. The project also highlights certain other vital aspects pertaining to the securities market
like the Role of regulatories, IPO process etc.
The CNX NIFTY is a well diversified 50 stock index accurately reflecting the overall market
conditions. The reward to risk ratio of CNX Nifty is higher than other leading indices, making it
a more attractive portfolio hence offering similar returns, but at lesser risk.CNX Nifty is based
upon solid economic research and is well respected internationally as a pioneering effort in better
understanding how to make a stock market index. CNX Nifty Index is computed using free float
market capitalization method, wherein the level of the index reflects the total free float market
value of all the stocks in the index relative to particular base market capitalization value. CNX
Nifty can be used for a variety of purposes such as benchmarking fund portfolios, launching of
index funds, ETF’s and structured products. Index Variants are CNX Defty, CNX Nifty Total
Return Index and CNX Nifty Dividend Index.
The Objectives of the study include understanding the Securities market in India. To analyze the
role of Equities in Indian financial system and to determine the best stocks amongst the NIFTY
50 stocks for investment. The project taken up can be divided into various phases. In the early
phase of the project the entire structure of the Indian Securities market was studied. Next, study
was on how technical analysis of stocks is done. Then, the analysis of the CNX NIFTY stocks
was done using certain selected indicators of Technical Analysis.
Since the project carried out is descriptive and analytical in nature, various documents were
referred. The data collection was done through secondary sources like websites and also from
personal interaction with the guide and other officials. At the same time related articles,
magazines, in-house journals of the India Bulls were referred.
INTRODUCTION
1.1 OVERVIEW OF THE INDIAN SECURITIES MARKET
INTRODUCTION
The Indian securities market, considered one of the most promising emerging markets, is among
the top eight markets of the world. The Stock Exchange, Mumbai, which was established in 1875
as “The Native Share and Stockbrokers Association” (a voluntary non-profit making
association), has evolved over the years into its present status as the premier Stock Exchange in
the country. At present 24 stock exchanges operate all over India. These stock exchanges provide
facilities for trading securities, Securities markets provide a common platform for transfer of
funds from the person who has excess funds to those who need them. Securities market is
regulated by the Securities& Exchange Board of India (SEBI).
COMPONENTS OF SECURITY MARKET
The major components of the securities market are listed below:
• Securities-Shares, Bonds, Debentures, Futures, Options, Mutual Fund Units
• Intermediaries-Brokers, Sub brokers, Custodians, Share transfer agents, Merchant Bankers
• Issuers of securities-Companies, Bodies corporate, Government, Financial Institutions, Mutual
funds, Banks
• Investors-Individuals, Companies, Mutual funds, Financial Institutions, Foreign Institutional
Investors
• Market Regulators-SEBI, RBI (to some extent), Department of Company Affairs
TYPES OF SECURITIES MARKETS
In the contest of equity products, which this publication seeks to cover in depth, the following
markets could be defined:
• Primary Market
• Secondary Market
• Derivatives market
Markets can also be broadly classified into equity and debt markets. Debt markets are
characterized
Currently by a large institutional presence, though an attempt is being made to attract retail
participation in recent times. Debt markets trade in Government securities, Treasury Bills,
Corporate Bonds and other debt instruments while Equity markets deal mainly in equity shares
and to a limited extent in preference shares and company debentures. Futures and Options in
indices and equity shares are of a relatively recent origin and form part of equity markets.
INTERMEDIARIES
Intermediaries provide various services to investors and issuers and have grown to become
among both powerful and knowledgeable due to due to substantial growth of securities markets
over the last century. A large variety and number of intermediaries provide intermediation
services in the Indian securities market.
ISSUERS OF SECURITIES
Every organisation, whether if be a company, institution or a Government body needs funds for
various operations. Organisations issue securities in the primary market depending on their
needs. The Securities market in India is an important source for corporate and government. The
corporate sector does depend significantly on equity and debt markets for meeting its funding
requirements though the share of equity markets has been decreasing over the recent years in
view of the rather dull primary market.
INVESTORS
Investors are those who have excess funds with them and want to employ it for returns. Indian
securities market has more than 20 million investors, comprising Individuals, Companies,
Mutual funds, Financial Institutions, Foreign Institutional Investors.
A review of shareholding pattern of all BSE Companies shows that, more than 50% of the shares
are held by the promoters of companies, whereas 15% by Institutional Investors.
After liberalization of the economy investments by foreign institutional investors have shown a
steady increase. Foreign direct investment has increased from Rs. 174 crores in 1990-91 to Rs.
10,686 crores in 2000-01. Portfolio Investment has shown a faster growth. It is increased from
Rs 11 crores in 1990-91 to Rs. 12,609 crores in 2000-2001.
MARKET REGULATORS
Securities market is regulated by following governing bodies:
1. Securities and Exchange Board of India (SEBI)
2. Department of Economic Affairs (DEA)
3. Department of Company Affairs (DCA)
4. Reserve Bank of India
5. Stock exchanges
Significant among the legislations for the securities market are the following:
1.The SEBI Act, 1992, which establishes SEBI to protect investors and development and
regulate securities market. All the powers under this act are exercised by SEBI.
2.The Companies Act, 1956 which set out the code of conduct for the corporate sector in relation
to issue, allotment and transfer of securities, disclosures to be made in public issues and non-
payment of dividend. Powers under this Act are exercised by SEBI in case of listed public
companies and public companies proposing to get their securities listed.
3.The Securities Contract (Regulation) Act, 1956, which provide for regulation of transaction ins
ecurities through control over stock exchanges, Most of lthe powers under this act are exercised
by Department of Economic Affairs (DEA), some are concurrently exercised by DEA and SEBI
and a few powers by SEBI.
4.The Depository Act, 1996, which provides for electronic maintenance and transfer of
ownership of demateralised securities, SEBI administers the rules and regulation under this Act.
The Securities and Exchange Board of India was established in 1988 to regulate and develop the
growth of the capital market. SEBI regulates the working of stock exchanges and intermediaries
such as stock brokers and merchant bankers, accords approval for mutual funds, and registers
Foreign Institutional Investors who wish to trade in Indian scrips. Section 11(1) of the Sebi Act
provides that it shall be the duty of the Board to protect the interests of investors securities and ot
promote the development of, and to regulate the securities market, by such measures as it thinks
fit.
SEBI regulates the business in stock exchanges and any other securities markets and the working
of collective investment schemes, including mutual funds, registered by it. SEBI promotes
investor’s education and training of intermediaries of securities market. It prohibits fraudulent
and unfair trade practices relating to securities markets, and insider trading in securities, with the
imposition of monetary penalties, on erring market intermediaries, It also regulates substantial
acquisition of shares and takeover of companies and can call for information from, carry out
inspection, conduct inquiries and audits of the stock exchanges and intermediaries and self
regulatory organizations in the securities market.
SEBI has introduced various reforms including improved transparency, computerisation,
enactments against insider trading, improved capital adequacy, imposed restrictions on forward
trading, and enacted provisions to encourage corporate membership in the stock exchanges.
Stock exchanges have also laid down strict compliance measures covering detection of irregular
trading practices through sophisticated surveillance systems, margining, trading volume controls
and set up investor protection funds, Stock exchanges ensure compliance of brokers on a
continuous basis through inspection and other measures.
PRIMARY MARKET
A market that issues new securities on an exchange. Companies, governments and other groups
obtain financing through debt or equity based securities. Primary markets are facilitated by
underwriting groups, which consist of investment banks that will set a beginning price range for
a given security and then oversee its sale directly to investors.
Also known as "new issue market" (NIM).
hMethods of issuing securities in the primary market are:
Initial public offering;
Rights issue (for existing companies)
Preferential issue
Kinds of issues
The different kinds of issues which can be made by an Indian company in India:
a) Public Issue
i. Initial Public Offer
ii. Further Public Offer
b) Right Issue
c) Bonus Issue
d) Private Placement
PUBLIC ISSUE
i) INITIAL PUBLIC OFFERING
An Initial Public Offering (IPO) is the selling of securities to the public in the primary market. It
is when an unlisted company makes either a fresh issue of securities or an offer for sale of its
existing securities or both for the first time to the public. This paves way for listing and trading
of the issuer’s securities. The sale of securities can be either through book building or through
normal public issue.
Reasons for IPO
1. Need for funds
2. Disinvestments of public sector units
3. Banks to enhance their capital adequacy
4. Expansion or diversification
5. Finance specific projects for a specific objective
BENEFITS OF GOING PUBLIC
The potential advantages that seem to prod companies to go public are as follows:
1) Access to Capital – The principal motivation for going public is to have access to larger
capital. A company that does not tap the public financial market may find it difficult to grow
beyond a certain point for want of capital.
2) Respectability – Many entrepreneurs believe that they have “arrived” in some sense if
their company goes public because a public company may command greater respectability.
Competent and ambitious executives would like to work for growth. Other things being equal,
public companies offer greater growth potential compared to non-public companies. Hence, they
can attract superior talent.
3) Window of Opportunity – As suggested by Jay Ritter and others that there are periods
in which stocks are overpriced. Hence, when a non-public company recognizes that other
companies in its industry are overpriced, it has an incentive to go public and exploit that
opportunity.
4) Benefit of Diversification – When a firm goes public those who have investment in it –
original owners, investors, managers, and others – can cash out of the firm and build a
diversified portfolio.
5) Signals from the Market – Stock prices represent useful information to the managers.
Every day, investors render judgments about the prospects of the firms. Although the market
may not be perfect, it provides a useful reality check.
6) Complements Product Marketing: Going public attracts media attention. Newspapers
and magazines are most likely to focus on public companies on which information is readily
available. This publicity can be harnessed and used towards marketing the product of the
company.
7) Competitive position: Many companies use their increased availability of capital as a
public company to enhance their competitive position. Additional capital available to a public
company permits greater market penetration.
8) Expands Business Relationship: Once a company is public company, information on
that company is readily available. Prospective suppliers, distributors and partners could easily
garner information and forge a relationship with such company.
9) Ability to take advantage of market price fluctuations: Once public, a company can
take advantage of market price fluctuations to sell stock when the markets are hot, buy back the
stock when the market is cold. This can often be an effective and low cost way to raise
significant capital.
IPO PROCESS
1) Appointment of Investing Banker
When a company is aiming to go public, at first it hires an investment bank to do the
underwriting, the way of raising money through equity or debt, functions associated with the
issue. Although, a company itself also may sell its shares but, usually an investment bank is
selected for that purpose. Underwriters act as intercessors between the public, who are investing,
and the companies.
The investment bank and the company will first initiate the process of deal negotiation. The main
discussing issues are the money amount that the company is going to raise, security type to be
issued and all the other details involved with the underwriting agreement.
2) Preparation of Red Herring Prospectus
Once the deal gets finalized, the investment bank sets a registration statement called Red
Herring Prospectus which will be submitted to the Securities and Exchange Commission. The
registration statement consists of information regarding the offering and also other company’s
information like, background of the management, financial statements, legal issues etc.
There is no price or issue size stated in the Red Herring. It is updated several times before being
called the final prospectus. It is called so because it contains a passage in red that states the
company is not attempting to sell its shares before the registration is approved by the SEC (Stock
Exchange Commission).
3) SEBI Approval
Then the Securities and Exchange Commission (SEC) needs a cooling off period during which it
will examine all the submitted documents and make sure that all information regarding the deal
have been given to them. After getting the SEC's approval, a date is going to be fixed on which
the company will offer the stock to the public.
4) Deciding on price band and share number
Then the company and the underwriter meet to decide the price of the stock. The price of the
share is determined through book building process. This decision depends highly on the current
market condition.
Book building process is defined as the process by which an underwriter attempts to determine
at what price to offer an IPO based on demand from institutional investors.
An underwriter "builds a book" by accepting orders from fund managers indicating the number
of shares they desire and the price they are willing to pay.
5) Making shares available to public
The stocks are sold in the market and money is raised from the investors.
ii) FURTHER PUBLIC OFFER
When already listed company makes either a fresh issue of securities to the public or an offer for
sale to the public, it is called FPO.
RIGHTS ISSUE
A rights issue is a way in which a company can sell new shares in order to raise capital. Shares
are offered to existing shareholders in proportion to their current shareholding, respecting their
pre-emption rights. The price at which the shares are offered is usually at a discount to the
current share price, which gives investors an incentive to buy the new shares — if they do not,
the value of their holding is diluted.
A rights issue to fund expansion can usually be regarded somewhat more optimistically,
although, as with acquisitions, shareholders should be suspicious because management may be
empire-building at their expense (the usual agency problem with expansion).
The rights are normally a tradable security themselves (a type of short dated warrant). This
allows shareholders who do not wish to purchase new shares to sell the rights to someone who
does. Whoever holds a right can choose to buy a new share (exercise the right) by a certain date
at a set price.
Some shareholders may choose to buy all the rights they are offered in the rights issue. This
maintains their proportionate ownership in the expanded company, so that an x% stake before
the rights issue remains an x% stake after it. Others may choose to sell their rights, diluting their
stake and reducing the value of their holding.
If rights are not taken up the company may (and in practice does) sell them on behalf of the
rights holder.
BONUS SHARES
The term bonus means an extra dividend paid to shareholders in a joint stock company from
surplus profits. When a company has accumulated a large fund out of profits - much beyond its
needs, the directors may decide to distribute a part of it amongst the shareholders in the form of
bonus. Bonus can be paid either in cash or in the form of shares. Cash bonus is paid by the
company when it has large accumulated profits as well as cash to pay dividend. Many a time, a
company is not in a position to pay bonus in cash in spite of sufficient profits because of
unsatisfactory cash position or because of its adverse effects on the working capital of the
company. In such a position, the company pays a bonus to its shareholders in the form of shares;
a free share thus issued is known as a bonus share.
A bonus share is a free share of stock given to current/existing shareholders in a company, based
upon the number of shares that the shareholder already owns at the time of announcement of the
bonus. While the issue of bonus shares increases the total number of shares issued and owned, it
does not increase the value of the company. Although the total number of issued shares
increases, the ratio of number of shares held by each shareholder remains constant.
Whenever a company announces a bonus issue, it also announces a "Book Closure Date" which
is a date on which the company will ideally temporarily close its books for fresh transfers of
stock. Read "Book Closure" for a better understanding.
An issue of bonus shares is referred to as a bonus issue.
Depending upon the constitutional documents of the company, only certain classes of shares may
be entitled to bonus issues, or may be entitled to bonus issues in preference to other classes.
bonus share is free share in fixed ratio to the shareholders. for exp..reliance ind. ltd. issue bonus
share in 1:1 ratio and Rs.13.00 as dividend/share
Sometimes a company will change the number of shares in issue by capitalizing its reserve. In
other words, it can convert the right of the shareholders because each individual will hold the
same proportion of the outstanding shares as before. Main reason for issuance is the price of the
existing share has become unwieldy.
Purpose: Usually bonus shares are issued with the intent of rewarding the investor, although
having said that the ex-bonus (post bonus) price of the share is adjusted to bonus ratio. So for
e.g, if the price of a share before bonus is Rs.100 and a bonus of 1:1 is issued, then ex-bonus
share price would adjust to Rs. 50, which means that the total market value will remain the same.
There is generally a case where the price of the share increases after bonus effect is incorporated.
Ratios' Impact:
The main financial effect of bonus share is that it increases the number of shares outstanding and
reduces the earnings per share (EPS). Basic EPS = (Net Profit after tax / no. of equity shares
outstanding).
PRIVATE PLACEMENT
Private placement occurs when a company makes an offering of securities not to the public, but
directly to an individual or a small group of investors. Such offerings do not need to be registered
with the Securities and Exchange Commission (SEC) and are exempt from the usual reporting
requirements. Private placements are generally considered a cost-effective way for small
businesses to raise capital without "going public" through an initial public offering (IPO).
"Although most business owners dream of taking their company public someday, many have had
to wait years for a traditional public offering," Gary D. Zeune and Timothy R. Baer explained in
an article for Corporate Cashflow Magazine. "For them, a private placement of equity or debt has
been a quicker, less expensive way to raise a limited amount of capital from a limited number of
investors. A private placement has been appropriate when a company still lacks the financial
strength or reputation to appeal to a broad base of investors and cannot afford the expense of a
public offering."
Advantages and Disadvantages
Private placements offer small businesses a number of advantages over IPOs. Since private
placements do not require the assistance of brokers or underwriters, they are considerably less
expensive and time consuming. In addition, private placements may be the only source of capital
available to risky ventures or start-up firms. "With loan criteria for commercial bankers and
investment criteria for venture capitalists both tightening, the private placement offering remains
one of the most viable alternatives for capital formation available to companies," Andrew J.
Sherman wrote in his book The Complete Guide to Running and Growing Your Business.
A private placement may also enable a small business owner to hand-pick investors with
compatible goals and interests. Since the investors are likely to be sophisticated business people,
it may be possible for the company to structure more complex and confidential transactions. If
the investors are themselves entrepreneurs, they may be able to offer valuable assistance to the
company's management. Finally, unlike public stock offerings, private placements enable small
businesses to maintain their private status.
Of course, there are also a few disadvantages associated with private placements of securities.
Suitable investors may be difficult to locate, for example, and may have limited funds to invest.
In addition, privately placed securities are often sold at a deep discount below their market value.
Companies that undertake a private placement may also have to relinquish more equity, because
investors want compensation for taking a greater risk and assuming an illiquid position. Finally,
it can be difficult to arrange private placement offerings in multiple states.
Fresh issues of shares and other securities are effected though the Primary market. It provides
issuers opportunity to issue securities, to raise resources to meet their requirements of business.
Equity issues can be effected at face value or at discount/premium. Issues at discounts are rare
and almost unheard of. Issuers can issue the securities in domestic market and/or international
market through ADR/GDR/ECB route.
SECONDARY MARKET
The secondary market is the financial market for trading of securities that have already been
issued in an initial private or public offering. Alternatively, secondary market can refer to the
market for any kind of used goods. In the secondary market, securities are sold by and
transferred from one investor or speculator to another. It is therefore important that the secondary
market be highly liquid and transparent. Before electronic means of communications, the only
way to create this liquidity was for investors and speculators to meet at a fixed place regularly.
ROLE OF THE SECONDARY MARKET
For the general investor, the secondary market provides an efficient platform for trading of his
securities. For the management of the company, Secondary equity markets serve as a monitoring
and control conduit—by facilitating value-enhancing control activities, enabling implementation
of incentive-based management contracts, and aggregating-information(via price discovery) that
guides management decisions.
LISTING OF SECURITIES
Listing means admission of securities of an issuer to trading privileges (dealings) on a stock
exchange through a formal agreement. The prime objective of admission to dealings on the
exchange is to provide liquidity and marketability to securities, as also to provide a mechanism
for effective control and supervision of trading.
TRADING OF SECURITIES
Trading securities is the act of buying and selling securities with the intention of making a quick
profit. Brokerage firms and investment advisers recommend buying securities for the anticipated
long-term appreciation of the company. Trading securities involve the same stocks and bonds
available to all investors on public exchanges. The difference is trading securities are timed by
investors to buy low and sell high in short time frames. While all securities can be traded in this
fashion, some securities have a natural ebb and flow that can be traded more regularly. For
example, retail store chains expect higher fourth-quarter earnings as a result of holiday shopping
that may lead investors to time early fourth quarter buying to be sold in the early first quarter.
Investor has the right to sell the securities investor hold at a price and time investor may choose.
Investor can do so personally with another person or through a recognized stock exchange.
Similarly, investor has the right to buy securities from anyone or through a recognized stock
exchange at a mutually acceptable price and time.
Whether it is a sale or purchase of securities, affected directly by investor or through an
exchange, all trades should be executed by a valid, duly completed and stamped transfer deed.
If investor chooses to deal (buy or sell) directly with another person, investor is exposed to
counter party risk, that is, the risk of non-performance by that party. However, if investor deals
through a stock exchange, this counter party risk is reduced due to trade/settlement guarantee
offered by the stock exchange mechanism. Further, investor also has some protection against
defaults by investor broker.
When investor operates through an exchange, investor has the right to receive the best price
prevailing at that time for the trade and the right to receive the money or the shares on time.
Investor also has the right to receive a contract note from the broker confirming the trade and
indicating the time of execution of the order and other necessary details of the trade.
Investor also has the right to receive good delivery and the right to insist on rectification of bad
delivery. If investor has a dispute with investor broker, investor can resolve it through arbitration
under the aegis of the exchange.
If investor decides to operate through an exchange, investor has to avail the services of a SEBI
registered broker/sub-broker. Investor has to enter into a broker-client agreement and file a client
registration form. Since the contract note is a legally enforceable document, investor should
insist on receiving it.
Investor has the obligation to deliver the shares in case of sale or pay the money in case of
purchase within the time prescribed. In case of bad delivery of securities by investor, investor
has the responsibility to rectify them or replace them with good ones.
Advantages of Secondary Market
1) Mobilize savings
2) Investment Opportunities
3) Investment Advice
4) Improves Corporate Governance
SETTLEMENT PROCESS
1) Trade details from Exchange to NSCCL (National Securities Clearing Corporation
Ltd)
2) NSCCL gives complete trade details to custodian / clearing member who affirm back.
Based on the affirmation NSCCL applies multilateral netting and determines
obligations.
3) After determining the obligations, the pay in advice of funds / securities takes place
4) If the transaction is related to funds, clearing banks will complete the transaction
5) If it is a shares related transaction, the instructions to depositories will be given to
perform the necessary transaction through depositary participants
6) Pay-in of securities (NSCCL advises depository to debit pool account of
custodians/CMs and credit its account and depository does it)
7) Pay-in of funds(NSCCL advises Clearing Banks to debit account of custodians/CMs
and credit its account and clearing bank does it)
8) Pay-out of securities (NSCCL advises depository to credit pool account of
custodians/CMs and debit its account and depository does it)
9) Pay-out of funds (NSCCL advises Clearing Banks to credit account of
custodians/CMs and debit its account and clearing bank does it)
10) Depository informs custodians/CMs through DPs.
11) Clearing Banks inform custodians/CMs.
DERIVATIVES MARKET
A derivative picks a risk or volatility in a financial asset, transaction, market rate, or
contingency, and creates a product the value of which will change as per changes in the
underlying risk or volatility. The idea is that someone may either try to safeguard against such
risk (hedging), or someone may take the risk, or may engage in a trade on the derivative, based
on the view that they want to execute. The risk that a derivative intends to trade is called
underlying.
A derivative is a financial instrument, whose value depends on the values of basic
underlying variable. In the sense, derivatives is a financial instrument that offers return based on
the return of some other underlying asset, i.e the return is derived from another instrument.
The best way will be take examples of uncertainties and the derivatives that can be structured
around the same.
• Stock prices are uncertain - Lot of forwards, options or futures contracts are based on
movements in prices of individual stocks or groups of stocks.
• Prices of commodities are uncertain - There are forwards, futures and options on
commodities.
• Interest rates are uncertain - There are interest rate swaps and futures.
• Foreign exchange rates are uncertain - There are exchange rate derivatives.
• Weather is uncertain - There are weather derivatives, and so on.
Derivative products initially emerged as a hedging device against fluctuations in
commodity prices, and commodity linked derivatives remained the sole form of such products
for almost three hundred years. It was primarily used by the farmers to protect themselves
against fluctuations in the price of their crops. From the time it was sown to the time it was ready
for harvest, farmers would face price uncertainties. Through the use of simple derivative
products, it was possible for the farmers to partially or fully transfer price risks by locking in
asset prices.
From hedging devices, derivatives have grown as major trading tool. Traders may execute their
views on various underlings by going long or short on derivatives of different types.
MAJOR TYPES OF DERIVATIVES
Derivative contracts have several variants. Depending upon the market in which they are traded,
derivatives are classified as 1) exchange traded and 2) over the counter. The most common
variants are forwards, futures, options and swaps.
Forwards:
A forward contract is a customized contract between two entities, where settlement takes
place as a specific date in the future at today’s predetermined price.
Ex: On 1st June, X enters into an agreement to buy 50 bales of cotton for 1st December at
Rs.1000 per bale from Y, a cotton dealer. It is a case of a forward contract where X has to pay
Rs.50000 on 1st December to Y and Y has to supply 50 bales of cotton.
Futures:
A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such
as a physical commodity or a financial instrument, at a predetermined future date and price.
Futures contracts detail the quality and quantity of the underlying asset; they are standardized to
facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of
the asset, while others are settled in cash. The futures markets are characterized by the ability to
use very high leverage relative to stock markets.
Options:
Options are of two types – call and put. Calls give the buyer the right but not the obligation to
buy a given quantity of the underlying asset, at a given price on or before a given future date.
Puts give the buyer the right, but not the obligation to sell a given quantity of the underlying
asset at a given price on or before a given date.
Derivatives trading commenced in India in June 2000 after SEBI granted the final approval to
this effect in May 2000 for trading in index futures, Currently, the Indian markets provide equity
derivatives of the following types:
• Index Futures-Two Indices
• Stock Futures-Twenty Nine stocks
• Index Options-Two Indices
• Stock Options-Twenty Nine Stocks
Derivatives help to improve market efficiencies because risks can be isolated and sold to those
who are willing to accept them at the least cost. Using derivatives breaks risk into pieces that can
be managed independently. Corporations can keep the risks they are most comfortable managing
and transfer those they do not want to other companies that are more willing to accept them.
From a market-oriented perspective, derivatives offer the free trading of financial risks.
Financial derivatives have changed the face of finance by creating new ways to understand,
measure, and manage financial risks. Ultimately, derivatives offer organizations the opportunity
to break financial risks into smaller components and then to buy and sell those components to
best meet specific risk-management objectives. Moreover, under a market-oriented philosophy,
derivatives allow for the free trading of individual risk components, thereby improving market
efficiency. Using financial derivatives should be considered a part of any business’s risk-
management strategy to ensure that value-enhancing investment opportunity can be pursued.
EQUITY MARKET
Publicly traded equities form a significant source of capital for firms, and equity markets are a
key part of the process of allocating capital among competing uses in our economy, Through
issuance of equities, companies enable a broad set of investors to share in the risk and reward of
economic activities.
This market in which shares are issued and traded, either through exchanges or over-the-counter
markets. Also known as the stock market, it is one of the most vital areas of a market economy
because it gives companies access to capital and investors a slice of ownership in a company
with the potential to realize gains based on its future performance.
Blue Chip: A nationally recognized, well-established and financially sound company. Blue chips
generally sell high-quality, widely accepted products and services. Blue chip companies are
known to weather downturns and operate profitably in the face of adverse economic conditions,
which helps to contribute to their long record of stable and reliable growth.
CONCEPT OF DEMATERIALIZATION
Dematerialization is the process by which a client can get physical certificates converted into
electronic balances.
An investor intending to dematerialize its securities needs to have an account with a DP
(Depositary Participant). The client has to deface and surrender the certificates registered in its
name to the DP. After intimating NSDL (National Securities Depositary Limited) electronically,
the DP sends the securities to the concerned Issuer/ R&T agent. NSDL in turn informs the Issuer/
R&T agent electronically, using NSDL Depository system, about the request for
dematerialization. If the Issuer/ R&T agent finds the certificates in order, it registers NSDL as
the holder of the securities (the investor will be the beneficial owner) and communicates to
NSDL the confirmation of request electronically. On receiving such confirmation, NSDL credits
the securities in the depository account of the Investor with the DP.
The client (registered owner) will submit a request to the DP in the Dematerialization
Request Form for dematerialization, along with the certificates of securities to be
dematerialized. Before submission, the client has to deface the certificates by writing
"SURRENDERED FOR DEMATERIALIZATION".
The DP will verify that the form is duly filled in and the number of certificates, number
of securities and the security type (equity, debenture etc.) are as given in the DRF. If the
form and security count is in order, the DP will issue an acknowledgement slip duly
signed and stamped, to the client.
The DP will scrutinize the form and the certificates. This scrutiny involves the following
o Verification of Client's signature on the dematerialization request with the
specimen signature (the signature on the account opening form). If the signature
differs, the DP should ensure the identity of the client.
o Compare the names on DRF and certificates with the client account.
o Paid up status
o ISIN (International Securities Identification Number)
o Lock - in status
o Distinctive numbers
In case the securities are not in order they are returned to the client and acknowledgment
is obtained. The DP will reject the request and return the DRF and certificates in case:
o A single DRF is used to dematerialize securities of more than one company.
o The certificates are mutilated, or they are defaced in such a way that the material
information is not readable. It may advise the client to send the certificates to the
Issuer/ R&T agent and get new securities issued in lieu thereof.
o Part of the certificates pertaining to a single DRF is partly paid-up; the DP will
reject the request and return the DRF along with the certificates. The DP may
advise the client to send separate requests for the fully paid-up and partly paid-up
securities.
o Part of the certificates pertaining to a single DRF is locked-in, the DP will reject
the request and return the DRF along with the certificates to the client. The DP
may advise the client to send a separate request for the locked-in certificates.
Also, certificates locked-in for different reasons should not be submitted together
with a single DRF
In case the securities are in order, the details of the request as mentioned in the form are
entered in the DPM (software provided by NSDL to the DP) and a Dematerialization
Request Number (DRN) will be generated by the system.
The DRN so generated is entered in the space provided for the purpose in the
dematerialization request form.
A person other than the person who entered the data is expected to verify details recorded
for the DRN. The request is then released by the DP which is forwarded electronically to
DM (DM - Depository Module, NSDL's software system) by DPM.
The DM forwards the request to the Issuer/ R&T agent electronically.
The DP will fill the relevant portion viz., the authorisation portion of the demat request
form.
The DP will punch the certificates on the company name so that it does not destroy any
material information on the certificate.
The DP will then despatch the certificates along with the request form and a covering
letter to the Issuer/ R&T agent.
The Issuer/ R&T agent confirms acceptance of the request for dematerialization in his
system DPM (SHR) and the same will be forwarded to the DM, if the request is found in
order.
The DM will electronically authorise the creation of appropriate credit balances in the
client's account.
The DPM will credit the client's account automatically.
The DP must inform the client of the changes in the client's account following the
confirmation of the request.
The issuer/ R&T may reject dematerialization request in some cases. The issuer or its
R&T Agent will send an objection memo to the DP, with or without DRF and security
certificates depending upon the reason for rejection. The DP/Investor has to remove
reasons for objection within 15 days of receiving the objection memo. If the DP fails to
remove the objections within 15 days, the issuer or its R&T Agent may reject the request
and return DRF and accompanying certificates to the DP. The DP, if the client so
requires, may generate a new dematerialization request and send the securities again to
the issuer or its R&T Agent. No fresh request can be generated for the same securities
until the issuer or its R&T Agent has rejected the earlier request and informed NSDL and
the DP about it.
RISKS
Many long-term financial advisers liken trading securities for the average investor to gambling.
The investor may be lucky once or twice, but more than likely does not have the resources or
time to follow the international market and how it affects domestic securities for well-timed
trades. Ultimately, the possibility of high returns is slapped with the reality of extremely fast
losses. Additionally, the constant buying and selling, even for successful investors, may have a
good portion of profits eaten up by capital gains taxes.
Any investment in stocks or bonds comes with the following types of risks.
Market Risk
Industry Risk
Regulatory Risk
Business Risk
MARKET RISK
The market risk defines the overall risk involved in the capital market investments. The stock
market rises and falls depending on a number of issues. The collective view of the investors to
invest in a particular stock or bond plays a significant role in the stock market rise and fall. Even
if the company is going through a bad phase, the stock price may go up due to a rising stock
market. While conversely, the stock price may fall because the market is not steady even if the
investor's company is doing well. Hence, these are the market risks that the stocks investors
generally face.
INDUSTRY RISK
The industry risk affects all the companies of a certain industry. Hence the stocks within an
industry fall under the industry risk. Industry risk refers to the dangers to a particular stock that
stem not from problems with the company but rather from far more wide ranging issues
involving the entire industry that the company belongs to.
REGULATORY RISK
The regulatory risk may affect the investors if the investor's company comes under the obligation
of government implemented new regulations and laws.
BUSINESS RISK
The business risk may affect the investors if the company goes through some convulsion
depending on management, strategies, market share and labor force.
Types of Analysis: Fundamental and Technical.
FUNDAMENTAL ANALYSIS
Fundamental analysis calculates future price movements by looking at a business’s economic
factors, known as fundamentals. It includes economic analysis, industry analysis and company
analysis. This type of investing assumes that the short-term market is wrong, but that stock price
will correct itself in the long run. Profits can be made by purchasing a mispriced security and
then waiting for the market to recognize its mistake. It is used by buy and hold investors and
value investors, among others.
Fundamental analysis looks at financial statements, including balance sheets, cash flow
statements and income statements, to determine a company’s intrinsic value. If the price of stock
falls below this intrinsic value, its purchase is considered a good investment. The most common
model for valuing stock is the discounted cash flow model, which uses dividends received by the
investor, along with the eventual sales price, the earnings of the company or the company’s cash
flows. It also considers the current amount of debt using the debt to equity ratio.
TOOLS USED IN FUNDAMENTAL ANALYSIS
Earnings per Share – EPS
Price to Earnings Ratio – P/E
Price to Sales – P/S
Price to Book – P/B
Dividend Payout Ratio
Dividend Yield
Book Value
Return on Equity
1) Earnings Per Share (EPS) –
EPS = Net Earnings / Outstanding Shares
The portion of a company's profit allocated to each outstanding share of common stock. Earnings
per share serve as an indicator of a company's profitability.
2) Price to earnings ratio (P/E) –
P/E Ratio = Market Price of Share / Earnings per Share
A measure of determining the value of a share. May also be used to measure the rate of return
expected by investors.
3) Price to Sales (P/S) –
P/S = Market cap / Revenues
Or
P / S = Stock price / Sales price per share
Much like P/E, the P/S number reflects the value placed on sales by the market. The lower the
P/S, the better the value, at least that’s the conventional wisdom.
4) Price to Book (P/B) –
P/B = Share price / Book value per share
Like the P/E, the lower the P/B, the better the value. Value investors would use a low P/B is
stock screens
5) Dividend Payout Ratio (DPR) –
DPR= Dividend per share / EPS
The DPR (it usually doesn’t even warrant a capitalized abbreviation) measures what a
company’s pays out to investors in the form of dividends.
6) Dividend Yield –
Dividend yield = Annual dividend per share / stock’s price per share
This measurement tells you what percentage return a company pays out to shareholders in the
form of dividends. Older, well-established companies tend to payout a higher percentage then do
younger companies and their dividend history can be more consistent.
7) Book Value –
Book Value = Assets – Liabilities
A company that is a viable growing business will always be worth more than its book value for
its ability to generate earnings and growth.
Book value appeals more to value investors who look at the relationship to the stock's price by
using the Price to Book ratio.
To compare companies, you should convert to book value per share, which is simply the book
value divided by outstanding shares.
8) Return on Equity –
Return on Equity (ROE) is one measure of how efficiently a company uses its assets to produce
earnings.
ROE = Net Income / Shareholder’s Equity
The amount of net income returned as a percentage of shareholders equity. Return on equity
measures a corporation's profitability by revealing how much profit a company generates with
the money shareholders have invested.
TECHNICAL ANALYSIS
Technical Analysis: Introduction
Technical analysis takes a completely different approach; it doesn't care one bit about the "value"
of a company or a commodity. Technicians (sometimes called chartists) are only interested in the
price movements in the market.
Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and
demand in a market in an attempt to determine what direction, or trend, will continue in the future.
In other words, technical analysis attempts to understand the emotions in the market by studying
the market itself, as opposed to its components. If you understand the benefits and limitations of
technical analysis, it can give you a new set of tools or skills that will enable you to be a better
trader or investor.
Technical Analysis: The Basic Assumptions
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.
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 data and what information this
data can provide about where the
security might move in the future.
The field of technical analysis is based on three assumptions:
1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the
fundamental factors of the company. However, technical analysis assumes that, at any given
time, a stock's price reflects everything that has or could affect the company - including
fundamental factors. Technical analysts believe that the company's fundamentals, along with
broader economic factors and market psychology, are all priced into the stock, removing the need to
actually consider these factors separately. This only leaves the analysis of price movement,
which technical theory views as a product of the supply and demand for a particular stock in the
market.
2. Price Moves in Trends
In technical analysis, price movements are believed to follow trends. This means that after a
trend has been established, the future price movement is more likely to be in the same direction
as the trend than to be against it. Most technical trading strategies are based on this assumption.
3. History Tends To Repeat Itself
Another important idea in technical analysis is that history tends to repeat itself, mainly in terms
of price movement. The repetitive nature of price movements is attributed to market psychology;
in other words, market participants tend to provide a consistent reaction to similar market stimuli
over time. Technical analysis uses chart patterns to analyze market movements and understand
trends. Although many of these charts have been used for more than 100 years, they are still
believed to be relevant because they illustrate patterns in price movements that often repeat
themselves.
Not Just for Stocks
Technical analysis can be used on any security with historical trading data. This includes stocks,
futures and commodities, fixed-income securities, forex, etc. In this tutorial, we'll usually analyze
stocks in our examples, but keep in mind that these concepts can be applied to any type of
security. In fact, technical analysis is more frequently associated with commodities and forex,
where the participants are predominantly traders.
Technical Analysis: Technical vs. Fundamental Analysis
Technical 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 price movements. Fundamental analysis, on the other hand,
looks at economic factors, known as fundamentals. Let's get into the details of how these two
approaches differ, the criticisms against technical analysis and how technical and fundamental
analysis can be used together to analyze securities.
The Differences
Charts vs. Financial Statements
At the most basic level, a technical analyst approaches a security from the charts, while a
fundamental analyst starts with the financial statements. (For further reading, see Introduction To
Fundamental Analysis and Advanced Financial Statement Analysis.)
By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries
to determine a company's value. In financial terms, an analyst attempts to measure a company's
intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a
stock trades below its intrinsic value, it's a good investment. Although this is an
oversimplification (fundamental analysis goes beyond just the financial statements) for the
purposes of this tutorial, this simple tenet holds true.
Technical traders, on the other hand, believe there is no reason to analyze a company's
fundamentals because these are all accounted for in the stock's price. Technicians believe that all
the information they need about a stock can be found in its charts.
Time Horizon
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 different timeframes that these two approaches use is a result of the nature of the investing
style to which they each adhere. It can take a long time for a company's value to be reflected in
the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until
the stock's market price rises to its "correct" value. This type of investing is called value investing
and assumes that the short -term market is wrong, but that the price of a particular stock will
correct itself over the long run. This "long run" can represent a timeframe of as long as several
years, in some cases.
Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of
time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a
daily basis like price and volume information. Also remember that fundamentals are the actual
characteristics of a business. New management can't implement sweeping changes overnight and
it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason
that fundamental analysts use a long-term timeframe, therefore, is because the data they use to
analyze a stock is generated much more slowly than the price and volume data used by technical
analysts.
Trading Versus Investing
Not only is technical analysis more short term in nature that fundamental analysis, but the goals
of a purchase (or sale) of a stock are usually different for each approach. In general, technical
analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors
buy assets they believe can increase in value, while traders buy assets they believe they can sell
to somebody else at a greater price. The line between a trade and an investment can be blurry,
but it does characterize a difference between the two schools.
The Critics
Some critics see technical analysis as a form of black magic. Don't be surprised to see them
question the validity of the discipline to the point where they mock its supporters. In fact,
technical analysis has only recently begun to enjoy some mainstream credibility. While most
analysts on Wall Street focus on the fundamental side, just about any major brokerage now
employs technical analysts as well.
Much of the criticism of technical analysis has its roots in academic theory - specifically the
efficient market hypothesis (EMH). This theory says that the market's price is always the correct one
- any past trading information is already reflected in the price of the stock and, therefore, any
analysis to find undervalued securities is useless.
There are three versions of EMH. In the first, called weak form efficiency, all past price information
is already included in the current price. According to weak form efficiency, technical analysis
can't predict future movements because all past information has already been accounted for and,
therefore, analyzing the stock's past price movements will provide no insight into its future
movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be
of little use in finding investment opportunities. The third is strong form efficiency, which states
that all information in the market is accounted for in a stock's price and neither technical nor
fundamental analysis can provide investors with an edge. The vast majority of academics believe
in at least the weak version of EMH, therefore, from their point of view, if technical analysis
works, market efficiency will be called into question. (For more insight, read What Is Market
Efficiency? and Working Through The Efficient Market Hypothesis.)
There is no right answer as to who is correct. There are arguments to be made on both sides and,
therefore, it's up to you to do the homework and determine your own philosophy.
Can They Co-Exist?
Although technical analysis and fundamental analysis are seen by many as polar opposites - the
oil and water of investing - many market participants have experienced great success by
combining the two. For example, some fundamental analysts use technical analysis techniques to
figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs
when the security is severely oversold. By timing entry into a security, the gains on the
investment can be greatly improved
Alternatively, some technical traders might look at fundamentals to add strength to a technical
signal. For example, if a sell signal is given through technical patterns and indicators, a technical
trader might look to reaffirm his or her decision by looking at some key fundamental data.
Oftentimes, having both the fundamentals and technicals on your side can provide the best-case
scenario for a trade.
While mixing some of the components of technical and fundamental analysis is not well received
by the most devoted groups in each school, there are certainly benefits to at least understanding
both schools of thought.
.
1.3 MAJOR FACTORS THAT AFFECT STOCK PRICE IN STOCK MARKET
GLOBALLY
When you wish to invest in the stock market, then you should always make a good
survey of the whole market. As you know that you cannot predict the stock market, so in
that case you need to know the functioning of the market. There are some major factors
that affect stock price. So let us discuss about the different factors affecting the stock
price in this article.
Demand and supply
One of the major factors affecting stock price is demand and supply. The trend of the
stock market trading directly affects the price. When people are buying more stocks, then
the price of that particular stock increases. On the other hand if people are selling more
stocks, then the price of that stock falls. So, you should be very careful when you decide
to invest in the Indian stock market.
Market Cap
Never try to guess the worth of a company simply by comparing the price of the stock.
You should always keep in mind that it is not the stock but the market capitalization of
the company that determines the worth of the company. So market cap is another factor
that affects stock price.
Lower interest rates
Lower interest rates can make shares more attractive for two reasons. Lower interest rates
help boost economic growth making firms more profitable. Also lower interest rates
make shares relatively more attractive than saving money in a bank or holding bonds. If
bond yields fall, it may encourage investors to switch into shares which give a relatively
better dividend.
Stability
Stock markets dislike shocks that could threaten economic stability and future growth.
Therefore, they will tend to fall on news of terrorist attacks or spikes in the price of oil.
They will also dislike political instability which may make it difficult to pursue strong
economic policies.
Earning/Price Ratio
Another important factor affecting stock price is the earning/price ratio. This gives you a
fair idea of a company’s share price when it is compared to its earnings. The stock
becomes undervalued if the price of the share is much lower than the earnings of a
company. But if this is the case, then it has the potential to rise in the near future. The
stock becomes overvalued if the price is much higher than the actual earning.
Economic growth
Higher economic growth or better prospects for growth will help firms be more
profitable because there will be more demand for goods and services. This will help boost
company dividends and therefore share prices.
Confidence and expectations
A key factor is the mood of investors. If they receive economic news that gives optimism
then they are more likely to buy shares. If they receive bad news they will sell. This is
why in the depth of a recession, stock markets can start to rise. Investors are always
trying to predict the future. Therefore if they feel the worst is over the stock market can
rally – even when economic fundamentals remain poor.
Bandwagon effect
At times the stock market seems to over-react to certain events. For example, in 1987,
relatively little bad news caused the stock market to fall 25%. Even today it remains a
little mystery why the stock market fell so much – there was no economic problem. In
fact the stock market soon recovered it’s lost ground. Part of the issue is that people
follow the mood. When prices fall, people may feel the need to follow suit and get out of
the market.
Related markets
Often investors have choices. For example, rather than investing in stock market, they
could buy government bonds or commodities. If investors feel government bonds are
overpriced and likely to fall, then the stock market can benefit as people move into
shares.
1.4 OBJECTIVES OF STUDY:
To determine the best stocks amongst the NIFTY 50 stocks for investment
To determine whether to sell, buy or retain a particular NIFTY 50 stock
To know the different indicators and chart patterns used in Technical Analysis
To understand about the Securities market in India
To analyze the role of Equities in Indian financial system
1.5 SCOPE OF THE STUDY:
The study is limited to “Equities” with special reference to stocks in the NIFTY 50 index. The
other stocks listed in the NSE, BSE or any other international stock exchange are not considered.
The study is purely based on the Technical Analysis of the selected stocks. The Fundamental
analysis of the stocks is not considered. In the Technical Analysis though may Indicators and
chart patterns exist, only few of the indicators and chart patterns are considered. These are
selected because; they are considered to be widely used indicators and patterns of study of
equities as a part of technical analysis.
Many other factors which usually impact the stocks like the economic conditions, the impact of
currency and the international markets are not considered here. This is due to lack of time.
1.6 METHODOLOGY
Inorder to do the technical analysis of the NIFTY 50 stocks, the secondary data was considered.
The data of the stocks for the past one year was taken. Various books and articles from the web
have been referred to gain an insight into Technical Analysis.
To study the performance of the stocks using Technical Indicators and chart patterns, the
websites like Moneycontrol.com and Nseindia.com were used. Also, NSE India, NSE guide
websites provided extensive information , for understanding the Equity Market in India .
LITERATURE REVIEW
Fernando Fernandez –Rodriguez, Simon Sosvilla –Rivero, Julian Andrada –Felix (1999)
assessed whether some simple forms of technical analysis can predict stock price movement in
the Madrid stock exchange, covering thirty-one-year period from Jan 1966 –Oct 1997.the results
provide strong support for profitability of those technical trading rules. By making use of
bootstrap techniques the author shows the returns obtained from these trading rules are not
consistent with several null models frequently used in finance.
C. L. Osler (2001) provides a microstructural explanation for the success of two familiar
predictions from technical analysis: (1) trends tend to be reversed at predictable support and
resistance levels, and (2) trends gain momentum once predictable support and resistance levels
are crossed. The explanation is based on a close examination of stop-loss and take-profit orders
at a large foreign exchange dealing bank. Take-profit orders tend to reflect price trends and stop-
loss Technical Analysis on Selected Stocks of Energy Sector orders tend to intensify trends. The
requested execution rates of these orders are strongly clustered at round numbers, which are
often used as support and resistance levels. Significantly, there are marked differences between
the clustering patterns of stop-loss and take-profit orders, and between the patterns of stop-loss
buy and stop-loss sell orders. These differences explain the success of the two predictions.
Gupta, (2003) examined the perceptions about the main sources of his worries concerning the
stock market. A sample comprise of middle-class household’s spread over 21 sates/union
territories. The study reveals that the foremost cause of worry for household investors is
fraudulent company management and in the second place is too much volatility and in the third
place is too much price manipulation.
Ravindra and Wang (2006) examine the relationship of trading volume to stock indices in Asian
markets. Stock market indices from six developing markets in Asia are analyzed over the 34
month period ending in October 2005. In the South Korean market, the causality extends from
the stock indices to trading volume while the causality is the opposite in the Taiwanese market.
Eugene F.Fama (1965) has answered the questions to what extend can the past history of a
common stock price can be used to make meaningful predictions concerning the future prices of
the stock? The theory of random walk on stock prices is studied with two hypotheses. They are i)
Successive price changes are independent and ii) The price changes conform to some probability
distribution. The data for this study consists of daily prices for each of the thirty stocks of the
Dow –Jones industrial average. This study concludes that there is strong and voluminous
evidence in favor of random walk theory.
Cooter (1962) found that the stock prices move at random when studied at one week interval.
The data for his study was week-end prices of forty five stocks from New York stock exchange.
He tested randomness of share by means of a mean square successive difference test. He
concluded that there was not one random walk model. He concluded that the share price trends
could be predicted when studied at fourteen-week interval. But in total the stock prices followed
a random walk at weekly intervals.
METHODOLOGY
The data pertaining to the all the 50 of the S&P CNX NIFTY has been collected
The data of the stocks has been collected for the period of one year. It is from
1st February , 2012 till 30th January, 2013
For the sake Analysis, six different tools were considered. They are the chart patterns and
indicators like Simple Moving Average, Moving Average Crossover, Relative Strength
Index, Moving Averege Convergence & Divergence, Volume.
The bullish or bearish nature of the stock is analyzed by considering the results given by
each indicator considered for every stock.
The final decision regarding each stock has been made when majority of the indicators
gave a similar result i.e.
The data has been collected through certain secondary sources like Nseindia.com,
Moneycontrol.com, stockezy.com etc. Some other books and documents were also
referred to collect the data.
Assumptions
The evaluation of stocks only technical analysis is done. No other fundamental analysis
or any other external factors have been considered.
For the purpose of analysis only certain indicators of technical analysis have been used.
DATA PRESENTATION AND ANALYSIS
HOW TO USE TECHNICAL ANALYSIS
1) Identify the trend of the market
2) Measure the strength of the trend
3) Look for the low risk entry into that trend
4) Use Money Management to determine the size of any position
5) Use an appropriate stop loss
6) Keep following trend till market proves it has reversed
7) Keep out of the market when the market is not showing significant trend one way or the
other
DOW THEORY
The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of technical
analysis today. Charles Dow created the Industrial Average, of top blue chip stocks, and a second
average of top railroad stocks (now the Transport Average). He believed that the behavior of the
averages reflected the hopes and fears of the entire market. The behavior patterns that he
observed apply to markets throughout the world.
Markets fluctuate in more than one time frame at the same time
The first is the daily variation due to local causes and the balance of buying and
selling at that particular time (Ripple).
The secondary movement covers a period ranging from days to weeks, averaging
probably between six to eight weeks (Wave).
The third move is the great swing covering anything from months to years, averaging
between 6 to 48 months. (Tide).
Bull markets are broad upward movements of the market that may last several years,
interrupted by secondary reactions. Bear markets are long declines interrupted by
secondary rallies. These movements are referred to as the primary trend.
Primary Phases of Movements
Secondary movements normally retrace from one-third to two thirds of the primary trend since
the previous secondary movement.
Daily fluctuations are important for short-term trading, but are unimportant in analysis of broad
market movements.
Primary Movements have Three Phases
1. Bull markets
o Bull markets commence with reviving confidence as business conditions improve.
o Prices rise as the market responds to improved earnings Rampant speculation dominates
the market and price advances are based on hopes and expectations rather than actual
result.
2. Bear markets
o Bear markets start with abandonment of the hopes and expectations that sustained
inflated prices.
o Prices decline in response to disappointing earnings.
o Distress selling follows as speculators attempt to close out their positions and securities
are sold without regard to their true value.
3. Ranging Markets
o A secondary reaction may take the form of a ‘line’, which may endure for several weeks.
o Price fluctuates within a narrow range of about five percent.
o Breakouts from a range can occur in either direction.
o Advances above the upper limit of the line signal accumulation and higher prices;
o Declines below the lower limit indicate distribution and lower prices;
o Volume is used to confirm price breakouts.
Bull Trends
A bull trend is identified by a series of rallies where each rally exceeds the highest point of the
previous rally. The decline, between rallies, ends above the lowest point of the previous decline.
Successive higher highs and higher lows
The start of an uptrend is signaled when price makes a higher low (trough), followed by a rally
above the previous high (peak):
Start = higher Low + break above previous High.
The end is signaled by a lower high (peak), followed by a decline below the previous low
(trough):
End = lower High + break below previous Low.
Bear Trends: A bear trend starts at the end of a bull trend: when a rally ends with a lower peak
and then retreats below the previous low. The end of a bear trend is identical to the start of a bull
trend. Each successive rally fails to penetrate the high point of the previous rally. Each decline
terminates at a lower point than the preceding decline.
Successive lower highs and lower lows
Large Corrections: A large correction occurs when price falls below the previous low (during a
bull trend) or where price rises above the previous high (in a bear trend).
A bull trend starts when price rallies above the previous high,
A bull trend ends when price declines below the previous low,
A bear trend starts at the end of a bull trend (and vice versa).
CHART PATTERN
1 Candlestick charting: Candlestick charts have been around for hundreds of years. They are
often referred to as “Japanese candles” because the Japanese would use them to analyze the price
of rice contracts.
Similar to a bar chart, candlestick charts also display the open, close, daily high and daily low.
The difference is the use of color to show if the stock went up or down over the day.
The chart below is an example of a candlestick chart for AT&T (T). Green bars indicate the
stock price rose, red indicates a decline:
Figure: Candlestick charting
Investors seem to have a "love/hate" relationship with candlestick charts. People either love them
and use them frequently or they are completely turned off by them. There are several patterns to
look for with candlestick charts - here are a few of the popular ones and what they mean.
. This is a bullish pattern - the stock opened at (or near) its low and closed near its high
The opposite of the pattern above, this is a bearish pattern. It indicates that the stock
opened at (or near) its high and dropped substantially to close near its low.
Known as "the hammer", this is a bullish pattern only if it occurs after the stock price
has dropped for several days. A small body along with a large range identifies a hammer. This
pattern indicates that a reversal in the downtrend is in the works.
2 Line Chart: The most basic of the four charts is the line chart because it represents only the
closing prices over a set period of time. The line is formed by connecting the closing prices over
the time frame. Line charts do not provide visual information of the trading range for the
individual points such as the high, low and opening prices. However, the closing price is often
considered to be the most important price in stock data compared to the high and low for the day
and this is why it is the only value used in line charts.
Figure: Line Chart
3 Support and resistance: Support and resistance are price levels at which movement should
stop and reverse direction. Think of support/resistance (S/R) as levels that act as a floor or a
ceiling to future price movements.
Support - A price level below the current market price, at which buying interest should be able
to overcome selling pressure and thus keep the price from going any lower.
Resistance - A price level above the current market price, at which selling pressure should be
strong enough to overcome buying pressure and thus keep the price from going any higher. One
of two things can happen when a stock price approaches a support/resistance level. On the one
hand, it can act as a reversal point: in other words, when a stock price drops to a support level, it
Known as a "star”. For the most part, stars typically indicate a reversal and or
indecision. There is a possibility that after seeing a star there will be a
reversal or change in the current trend.
will go back up. On the other hand, S/R levels may reverse roles once they are penetrated.
For example - When the market price falls below a support level, that former support level will
then become a resistance level when the market later trades back up to that level.
Figure: Support and resistance
This chart shows an excellent example of support and resistance levels for General Electric (GE).
Notice that once the stock price penetrated below the support level in December, it became the
resistance level. You also need to understand that S/R levels vary in strength, leading to certain
price levels being designated as major or minor S/R levels. For example -- A five-year high on a
bar chart would be a much more significant and useful resistance level than a one-month
resistance level.
4 Cup and Handle: This is a pattern on a bar chart that can be as short as seven weeks and as
long as 65 weeks. The cup is in the shape of a "U". The handle has a slight downward drift. The
right-hand side of the pattern has low trading volume. As the stock comes up to test the old
highs, the stock will incur selling pressure by the people who bought at or near the old high. This
selling pressure will make the stock price trade sideways with a tendency towards a downtrend
for anywhere from four days to four weeks, then it will take off.
This pattern looks like a pot with a handle. It is one of the easier patterns to detect; and investors
have made a lot of money using it.
Figure: Cup and Handle
5 Head and Shoulders: This is a chart formation resembling an "M" in which a stock's price:
o Rises to a peak and then declines, then
o Rises above the former peak and again declines, and then
o Rises again but not to the second peak and again declines.
The first and third peaks are shoulders, and the second peak forms the head. This pattern is
considered a very bearish indicator.
Figure: Head and Shoulders
6 Double Bottom: This pattern resembles a "W" and occurs when a stock price drops to a
similar price level twice within a few weeks or months. You should buy when the price passes
the highest point in the handle. In a perfect double bottom, the second decline should normally
go slightly lower than the first decline to create a shakeout of jittery investors. The middle point
of the "W" should not go into new high ground. This is a very bullish indicator.
Figure: Double Bottoms
The belief is that, after two drops in the stock price, the jittery investors will be out and the long-
term investors will still be holding on.
7 Double Tops: Double tops point out a weakness of the uptrend and warn for a change of trend
generally a selling crazy starts when this formation is indicates.
Figure: Double Tops
8 Falling wedges: Falling wedges are opposite of the rising wedges and pull back reactions
during the up trends. Sellers continue to believe the securities in their hand do not want to sell so,
volume decreases significantly. When the upper line is broken, generally a rally starts. So this
formation is a chance to buy security available prices in an uptrend.
Figure: Falling wedges
9 Symmetrical Triangles: All triangles formations are consolidation formations. In symmetrical
triangle direction of the trend is not known. It is only can be identified after one of the line
broken. Prices go up if upper line broken. And go down if lower line broken. Volume is very
important for triangle formations. Volume should decrease during the formations.
Figure: Symmetrical Triangles
10 Descending triangles: It is a signal for down trend. Price target can be found approximately
by drawing a parallel line to descending line.
Figure: Descending triangles
11 Ascending Triangles: It is a signal for uptrend. By drawing a parallel line to descending line,
price target can be calculated approximately.
Figure: Ascending triangle
INDICATORS OF THE STUDY
Exponential Moving Average (EMA)
Are calculated by applying a percentage of today’s closing price to yesterday’s moving average
value. Use an exponential moving average to place more weight on recent prices.
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. As you can see in Figure 2, a 15-period EMA raises and falls faster than
a 15-period SMA. This slight difference doesn’t seem like much, but it is an important factor to
be aware of since it can affect returns.
Figure: Exponential Moving Averages (EMA)
Moving Average Convergence Divergence (MACD)
Common, the “MACD” is a trend following, momentum indicator that shows the relationship
between two moving averages of prices. To Calculate the MACD subtract the 26-day EMA
from a 12-day EMA. A 9-day dotted EMA of the MACD called the signal line is then plotted on
top of the MACD. There are 3 common methods to interpret the MACD:
Crossover – When the MACD falls below the signal line it is a signal to sell. Vice versa when
the MACD rises above the signal line.
Divergence – When the security diverges from the MACD it signals the end of the current trend.
Overbought/Oversold – When the MACD rises dramatically (shorter moving average pulling
away from longer term moving average) it is a signal the security is overbought and will soon
return to normal levels.
Other less common moving averages include triangular, variable, and weighted moving average.
All of them being slight deviations from the++ ones above and are used to detect different
characteristics such as volatility, and weighting different time spans.
One of the easiest indicators to understand, the moving average, shows the average value of a
security’s price over a period of time. To find the 50-day moving average, you would add up the
closing prices (but not always – explain later) from the past 50 days and divide them by 50.
Because prices are constantly changing, the moving average will move as well. It should also be
noted that moving averages are most as well. It should also be noted that moving averages are
most often used then compared or used in conjunction with other indicators such as moving
average convergence divergence (MACD) and exponential moving (E M A).
The most commonly used moving averages are 20, 30, 50,100 and 200 days. Each moving
average provides a different interpretation on what the stock will do-there is not one right time
frame. The longer the time spans, the less sensitive the moving average will be to daily price
changes. Moving averages are used to emphasize the direction of a trend and smooth out price
and volume fluctuations that can confuse interpretation. Here is a visual example using stock
price
Figure: Moving Average Convergence Divergences (MACD)
Notice that back, in September the stock price dropped well below its 50-day average (the green
line) there has been a steady downward trend since then and no really strong divergence until the
end of December when it rose above its 50-days average and continued to rise for several weeks.
Typically, when a stock price moves below its moving average it is a bad sign because the stock
is moving on a negative trend. The opposite is true for stock that exceed their moving average-in
this case, hold on for the ride.
BOLLINGER BANDS WIDTH
Developed by John Bollinger, Bollinger Bands are an indicator that allows users to compare
volatility and relative price levels over a period time. The indicator consists of three bands
designed to encompass the majority of a security's price action. The purpose of Bollinger Bands
is to provide a relative definition of high and low. By definition prices are high at the upper band
and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in
comparing price action to the action of indicators to arrive at systematic trading decisions.
Bollinger Bands consist of a set of three curves drawn in relation to securities prices. The middle
band is a measure of the intermediate-term trend, usually a simple moving average that serves as
the base for the upper and lower bands. The interval between the upper and lower bands and the
middle band is determined by volatility, typically the standard deviation of the same data that
were used for the average. The default parameters, 20 periods and two standard deviations, may
be adjusted to suit your purposes:
Middle Bollinger Band = 20-period simple moving average
Upper Bollinger Band = Middle Bollinger Band + 2 * 20-period standard deviation
Lower Bollinger Band = Middle Bollinger Band - 2 * 20-period standard deviation
Standard deviation is a statistical unit of measure that provides a good assessment of a price
plot's volatility. Using the standard deviation ensures that the bands will react quickly to price
movements and reflect periods of high and low volatility. Sharp price increases (or decreases),
and hence volatility, will lead to a widening of the bands.
Figure: Bollinger Bands Width
The center band is the 20-day simple moving average. The upper band is the 20-day simple
moving average plus 2 standard deviations. The lower band is the 20-day simple moving average
less 2 standard deviations.
On-Balance Volume
The on-balance volume (OBV) indicator is well-known technical indicators that reflect
movements in volume. It is also one of the simplest volume indicators to compute and
understand. Joe Granville introduced the On Balance Volume (OBV) indicator in his 1963 book,
Granville's New Key to Stock Market Profits. This was one of the first and most popular
indicators to measure positive and negative volume flow. The concept behind the indicator:
volume precedes price. OBV is a simple indicator that adds a period's volume when the close is
up and subtracts the period's volume when the close is down. A cumulative total of the volume
additions and subtractions form the OBV line. This line can then be compared with the price
chart of the underlying security to look for divergences or confirmation.
Calculation
As stated above, OBV is calculated by adding the day's volume to a running cumulative total
when the security's price closes up, and subtracts the volume when it closes down.
For example, if today the closing price is greater than yesterday's closing price, then the new
OBV = Yesterday's OBV + Today's Volume
If today the closing price is less than yesterday's closing price, then the new
OBV = Yesterday's OBV - Today's Volume
If today the closing price is equal to yesterday's closing price, then the new
OBV = Yesterday's OBV
Use
The idea behind the OBV indicator is that changes in the OBV will precede price changes. A
rising volume can indicate the presence of smart money flowing into a security. Then once the
public follows suit, the security's price will likewise rise.
Like other indicators, the OBV indicator will take a direction. A rising (bullish) OBV line
indicates that the volume is heavier on up days. If the price is likewise rising, then the OBV can
serve as a confirmation of the price uptrend. In such a case, the rising price is the result of an
increased demand for the security, which is a requirement of a healthy uptrend.
However, if prices are moving higher while the volume line is dropping, a negative divergence is
present. This divergence suggests that the uptrend is not healthy and should be taken as a
warning signal that the trend will not persist.
The numerical value of OBV is not important, but rather the direction of the line. A user should
concentrate on the OBV trend and its relationship with the security's price.
Figure: On-Balance Volumes
This chart shows how the OBV line can be used as confirmation of a price trend. The peak in
September was followed by lower price movements that corresponded with volume spikes, thus
implying that the downtrend was going to continue.
Aroon Oscillators
The Aroon indicator is a relatively new technical indicator that was created in 1995. The Aroon
is a trending indicator used to measure whether a security is in an uptrend or downtrend and the
magnitude of that trend. The indicator is also used to predict when a new trend is beginning.
The indicator is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon down" line
(red dotted line). The Aroon up line measures the amount of time it has been since the highest
price during the time period. The Aroon down line, on the other hand, measures the amount of
time since the lowest price during the time period. The number of periods that are used in the
calculation is dependent on the time frame that the user wants to analyze.
Figure: Aroon Up And Down Oscillator
An expansion of the Aroon is the Aroon oscillator, which simply plots the difference between the
Aroon up and down lines by subtracting the two lines. This line is then plotted between a range
of -100 and 100. The centerline at zero in the oscillator is considered to be a major signal line
determining the trend. The higher the value of the oscillator from the centerline point, the more
upward strength there is in the security; the lower the oscillator's value is from the centerline, the
more downward pressure. A trend reversal is signaled when the oscillator crosses through the
centerline. For example, when the oscillator goes from positive to negative, a downward trend is
confirmed. Divergence is also used in the oscillator to predict trend reversals. A reversal warning
is formed when the oscillator and the price trend are moving in an opposite direction.
The Aroon lines and Aroon oscillators are fairly simple concepts to understand but yield
powerful information about trends. This is another great indicator to add to any technical trader's
arsenal.
Money Flow Index
The Money Flow Index (MFI) is a momentum indicator that is similar to the Relative Strength
Index (RSI) in both interpretation and calculation. However, MFI is a more rigid indicator in that
it is volume-weighted, and is therefore a good measure of the strength of money flowing in and
out of a security. It compares "positive money flow" to "negative money flow" to create an
indicator that can be compared to price in order to identify the strength or weakness of a trend.
Like the RSI, the MFI is measured on a 0 - 100 scale and is often calculated using a 14 day
period.
The "flow" of money is the product of price and volume and shows the demand for a security
and a certain price. The money flow is not the same as the Money Flow Index but rather is a
component of calculating it. So when calculating the money flow, we first need to find the
average price for a period. Since we are often looking at a 14-day period, we will calculate the
typical price for a day and use that to create a 14-day average.
Typical Price = (Day high + Day low + Day close) / 3
Money Flow = (Typical Price) X Volume
The MFI compares the ratio of "positive" money flow and "negative" money flow. If typical
price today is greater than yesterday, it is considered positive money. For a 14-day average, the
sum of all positive money for those 14 days is the positive money flow. The MFI is based on the
ratio of positive/negative money flow (Money Ratio).
Money Ratio = positive money flow / Negative money flow
Finally, the MFI can be calculated using this ratio:
Money Flow Index- 100-(100 / (1 + money ratio))
The fewer number of days used to calculate the MFI, the more volatile it will be.
The MFI can be interpreted much like the RSI in that it can signal divergences and
overbought/oversold conditions.
Positive and negative divergences between the stock and the MFI can be used as buy and sell
signals respectively, for they often indicate the imminent reversal of a trend. If the stock price is
falling, but positive money flow tends to be greater than negative money flow, then there is more
volume associated with daily price rises than with the price drops. This suggests a weak
downtrend that threatens to reverse as money flowing into the security is "stronger" than money
flowing out of it.
As with the RSI, the MFI can be used to determine if there is too much or too little volume
associated with a security. A stock is considered "overbought" if the MFI indicator reaches 80
and above (a bearish reading). On the other end of the spectrum, a bullish reading of 20 and
below suggests a stock is "oversold".
Figure: Money Flow Index
Rate of change indicators (ROC)
It is a very popular oscillator which measures the rate of change of the current price as compared
to the price a certain number of days or weeks back. The ROC has to be used along with price
chart. The buying and selling signals indicated by the ROC should also be confirmed by the price
chart.
Figure: Rate of change
Relative strength index (RSI)
There are a few different tools that can be used to interpret the strength of a stock. One of these
is the Relative Strength Index (RSI), which is a comparison between the days that a stock
finishes up and the days it finishes down. This indicator is a big tool in momentum trading.
The RSI is a reasonably simple model that anyone can use. It is calculated using the following
formula.
RSI = 100 - [100/(1 + RS)]
RS = (Avg. of n-day up closes)/(Avg. of n-day down closes)
n = days (most analysts use 9 - 15 day RSI)
The RSI ranges from 0 to 100. At around the 70 levels, a stock is considered overbought and you
should consider selling. In a bull market some believe that 80 is a better level to indicate an
overbought stock since stocks often trade at higher valuations during bull markets. Likewise, if
the RSI approaches 30, a stock is considered oversold and you should consider buying. Again,
make the adjustment to 20 in a bear market.
The smaller the number of days used, the more volatile the RSI is and the more often it will hit
extremes. A longer term RSI is more rolling, fluctuating a lot less. Different sectors and
industries have varying threshold levels when it comes to the RSI. Stocks in some industries will
go as high as 75-80 before dropping back, while others have a tough time breaking past 70. A
good rule is to watch the RSI over the long term (one year or more) to determine at what level
the historical RSI has traded and how the stock reacted when it reached those levels.
The RSI is a great indicator that can help you make some serious money. Be aware that big
surges and drops in stocks will dramatically affect the RSI, resulting in false buy or sell signals.
Most investors agree that the RSI is most effective in "backing up" or increasing confidence
before making an investment decision - don't invest simply based on the RSI numbers.
Figure: Relative Strength Index (RSI)
Above, we have an RSI chart for AT&T. The RSI is the green line, and its scale is the numbers
on the right hand side that go from 0 to 100. Notice the RSI was approaching the 60-70 level in
December and January, and then the stock (blue line) sold off. Also, notice that when the RSI
dropped to 25 around October the stock climbed up nearly 30% in just a couple of weeks.
Using the moving averages, trend lines divergence, support and resistance lines along with the
RSI chart can be very useful. Rising bottoms on the RSI chart can produce the same positive
trend results as they would on the stock chart. Should the general trend of the stock price tangent
from the RSI, it might spark a warning that the stock is either over- or under bought.
Momentum
The momentum is certainly the easiest one to compute. The momentum is the difference between
today's price and the one of n days before.
With: Pt today's price. Pt-n the price at the date t-n
The momentum is: MOt = Pt - Pt-nrf
TRIX (Triple exponential)
"Trix (or TRIX) is a technical analysis oscillator developed in the 1980s by Jack Huston, editor
of Technical Analysis of Stocks and Commodities magazine. It shows the slope (i.e. derivative)
of a triple-smoothed exponential moving average. The name Trix is from "triple exponential
Trix is calculated with a given N-day period as follows:
o Smooth prices (often closing prices) using an N-day exponential moving average
o Smooth a third time, using a further N-day EMA
o Calculate the percentage difference between today's and yesterday's value in that final
smoothed series
Like any moving average, the triple EMA is just a smoothing of price data and therefore is trend-
following. A rising or falling line is an uptrend or downtrend and Trix shows the slope of that
line, so it's positive for a steady uptrend, negative for a downtrend, and a crossing through zero is
a trend-change, i.e. a peak or trough in the underlying average.
The triple-smoothed EMA is very different from a plain EMA. In a plain EMA the latest few
days dominate and the EMA follows recent prices quite closely; however, applying it three times
results in weightings spread much more broadly, and the weights for the latest few days are in
fact smaller than those of day’s further past. The following graph shows the weightings for an
N=10 triple EMA (most recent days at the left).
Graph shows the weightings for an N=10 triple EMA (most recent days at the left).
Figure: TRIX (Triple exponential)
Triple exponential moving average weightings, N=10 (percentage versus days ago)
Note that the distribution's mode will lie with pN-2's weight, i.e. in the graph above p8 carries the
highest weighting. An N of 1 is invalid.
The easiest way to calculate the triple EMA based on successive values is just to apply the EMA
three times, creating single-, then double-, then triple-smoothed series. The triple EMA can also
be expressed directly in terms of the prices as below, with p0 today's close, p1 yesterday's, etc,
and with (as for a plain EMA).
The coefficients are the triangle numbers, n (n+1)/2. In theory, the sum is infinite, using all past
data, but as f is less than 1 the powers fn become smaller as the series progresses, and they
decrease faster than the coefficients increase, so beyond a certain point the terms are negligible.
Williams %R
Developed by Larry Williams, Williams % R is a momentum indicator that works much like the
Stochastic Oscillator. It is especially popular for measuring overbought and oversold levels. The
scale ranges from 0 to -100 with readings from 0 to -20 considered overbought, and readings
from -80 to -100 considered oversold.
William %R, sometimes referred to as %R, shows the relationship of the close relative to the
high-low range over a set period of time. The nearer the close is to the top of the range, the
nearer to zero (higher) the indicator will be. The nearer the close is to the bottom of the range,
the nearer to -100 (lower) the indicator will be. If the close equals the high of the high-low range,
then the indicator will show 0 (the highest reading). If the close equals the low of the high-low
range, then the result will be -100 (the lowest reading).
Calculation
%R = [(highest high over? periods - close) / (highest high over? periods - lowest low over?
periods)] * -100
Typically, Williams % R is calculated using 14 periods and can be used on intraday, daily,
weekly or monthly data. The time frame and number of periods will likely vary according to
desired sensitivity and the characteristics of the individual security.
Use
It is important to remember that overbought does not necessarily imply time to sell and oversold
does not necessarily imply time to buy. A security can be in a downtrend, become oversold and
remain oversold as the price continues to trend lower. Once a security becomes overbought or
oversold, traders should wait for a signal that a price reversal has occurred. One method might be
to wait for Williams %R to cross above or below -50 for confirmation.
Price reversal confirmation can also be accomplished by using other indicators or aspects of
technical analysis in conjunction with Williams %R.
One method of using Williams %R might be to identify the underlying trend and then look for
trading opportunities in the direction of the trend. In an uptrend, traders may look to oversold
readings to establish long positions. In a downtrend, traders may look to overbought readings to
establish short positions.
Figure: Williams % R
The chart of Weyerhaeuser with a 14-day and 28-day Williams % R illustrates some key points:
o 14-day %R appears quite choppy and prone to false signals.
o 28-day %R smoothed the data series and the signals became less frequent and more
reliable.
o When the 28-day %R moved to overbought or oversold levels, it typically remained there
for an extended period and the stock continued its trend.
o Some good entry signals were given with the 28-day %R by waiting for a move above or
below -50 for confirmation.
EVALUATION OF TECHNICAL ANALYSIS:
Technical analysis appears to be a highly controversial approach to security analysis. It has its
ardent votaries: it has its severe critics. The advocates of technical analysis offer the following
interrelated arguments in support of their position:
Under the influence of crowed psychology, trend persists for quite some time. Tools of
technical analysis that help in identifying these trends early are helpful aids in investment
decision making.
Shift in demand and supply are gradual rather than instantaneous. Technical analysis
helps in detecting these shifts rather early and hence provides clues to future price
movement.
Fundamental information about a company is absorbed and assimilated by the market
over a period. Hence, the price movement tends to continue in more or less the same
direction until the information is assimilated in the stock price.
Charts provide what has happened in the past and hence give a sense of volatility that can
be expected from the stock. Future, the information on trading volume which is ordinarily
provide at the bottom of a bar chart gives a fair idea of the extent of the public interest in
the stock
The detractors of technical analysis believe that the technical analysis is a useless exercise. Their
arguments run as follows:
Most technical analyst are not able to offer convincing explanation for the tools
employed by them
Empirical evidence in support of the random-walk hypothesis casts its shadow over the
usefulness of technical analysis.
By the time an uptrend or down may have been signaled by technical analysis, it already
have taken place.
Ultimately, technical analysis must be a self-defeating proposition as more and more
people employ the value of such analysis tends to decline.
DATA ANALYSIS
The technical analysis of the fifty stocks that were listed in the s&p cnx nifty has been done here.
This is done by considering the data of the stocks for the past one year i.e. from 1 st of february,
2012 till 31st of january, 2013. The chart patterns and trends of the stocks were analyzed from the
data obtained. Chart patterns, and five different indicators which include volume, relative
strength index, moving average convergence & divergence, simple moving average, moving
average cross over were considered to analyze stock trends. Each indicator provided a buy or sell
decision for a given stock. After result was obtained from each indicator/ chart pattern, the
overall decision was arrived at. For a particular stock if majority of the indicators gave a same
signal as ‘buy’ or ‘sell’, then the overall decision was concluded to be the same.
The table below contains the analysis and the decision finally arrived at. Amongst these stocks
some stocks indicated strong sell or strong buy decision. These were the stocks for which at least
four indicators gave the same buy or sell signal. The graphs for the the top ten stocks with stong
buy/sell signals are presented below the table.
ScriptPattern
Simple Moving Average
Moving Average Crossover
MACD RSI
Volume
Overall Decision
Tata Motors Buy Sell Sell Buy Buy Buy BuyRanbaxy sell Buy sell sell sell sell sellrpower sell Buy Buy Buy sell Buy Buytata steel sell Buy Buy Buy sell Buy BuyAxis Bank sell Buy Sell Buy sell Sell sellAmbuja Cem Buy Buy NONE Buy Buy sell BuyDr.Reddys Buy Buy Buy Buy sell Buy BuyACC Buy Buy Sell Buy sell Buy Buyjindal sell sell Buy Buy sell Sell sellHDFC Buy Buy sell Buy sell Buy BuyGrasim Buy Sell Buy Buy Buy Buy Buy
gail sell Buy sell sellnone Buy sell
ongc none Buy Buy Buy sell Buy Buyhero moto none sell Buy Buy Buy Sell Buycairn Buy sell Buy Buy sell Sell Nonebajaj auto Buy sell sell Buy sell buy None
sbi Buy sell Buy Buy sell buy BuyContinuation
ScriptPattern
Simple Moving Average
Moving Average Crossover
MACD RSI
Volume
Overall Decision
pnb sell Buy Buy Buy sell Buy Buybpcl none sell Buy Buy sell sell sell
power grid none Buy Buy Buynone sell Buy
hdfc bank Buy Sell Buy Buy sell Buy Buyreliance none Buy Buy Buy sell Buy Buycipla Sell Buy Sell Buy Buy Buy Buyhcl tech Buy Buy Sell Buy Buy Buy Buysesa goa sell Buy Buy Buy sell sell nonetcs Buy Buy sell sell Buy Buy Buyhul Buy Buy sell sell Buy Buy Buyitc Buy sell sell none sell Buy Buysail sell Buy Buy Buy sell sell none
wipro none Buy Buy Buynone Buy Buy
infosys Buy Buy sell sell Buy Buy Buysiemens sell sell Buy Buy sell sell sellbharti airtel sell Buy Buy sell sell sell Sell
bhel sell sell sell nonenone Buy sell
reliance infra sell Buy sell Buy sell Buy nonetata power sell sell Buy Buy sell none sellsterline ind sell Buy Buy Buy sell Buy Buyjp associates sell Buy Buy Buy sell Buy Buyntpc sell Buy Buy Buy sell Buy sell
dlf none Buy Buy Buynone Buy Buy
rcom none Buy Buy Buy sell Buy Buyicici bank Buy Buy Buy Buy sell sell Buyidfc Buy Buy Buy Buy sell sell Buyhindalco sell Sell Sell Buy Buy Buy Nonecoal india Sell sell Buy Buy sell sell Sellsun pharma Buy Buy Sell Buy Buy Sell Buykotak bank Buy Buy Buy Buy Buy sell Buymaruti Buy Buy Buy Buy Buy Buy BuyLT Buy Buy Sell Sell sell Buy NoneM&M Buy Buy Sell Buy Buy Buy Buy
1. DR. REDDYS LABORATORIES
SCRIPT PATTERN
MO
V
AVG
CROSSOVE
R
MAC
D RSI
VOLUM
E
OVERALL
DECISION
DR.REDDY
S BUY BUY BUY BUY
BU
Y BUY BUY
This is the best stock of all to be invested in. This is because all the chosen indicators convey that
the stock is bullish and it is to be brought. The chart displays a higher high pattern of the stock’s
graph. It means it is bullish. The RSI is above 30. This is a bullish sign too. MACD is 24.21
which which indicates the stock is bullish. The Simple moving average conveys that the stock is
bullish as a full candle formed was only seen above the SMA line. The Moving Average
Crossover also coveys bullish sign as the 9 day moving average line is above the 27 day moving
average line. Very high volumes were traded recently clearly indicating the bullish nature of the
stock. As, sixr out of six factors considered convey that the stock is bullish, the overall decision
is that the stock is to be bought.
2. MARUTHI SUZUKI
SCRIPT PATTERN MOV CROSSOVER MACD RSI VOLUME OVERALL
AVG DECISION
MARUT
I BUY BUY BUY BUY BUY BUY BUY
Analysis of the stock:
The chart displays a higher high pattern of the stock’s graph. It means it is bullish. The RSI is
below 70. The stock is considered to be in bullish zone. MACD is 22.4 which indicates the stock
is bullish. The Simple moving average conveys that the stock is bullish as a full candle formed
was only seen above the SMA line. The Moving Average Crossover also coveys a bullish sign as
the 9 day moving average line is over the 27 day moving average line. Very high volumes were
traded recently clearly indicating the bullish nature of the stock. As, six out of six factors
considered convey that the stock is bullish, the overall decision is that the stock is to be bought.
3. HCL TECH
SCRIP
T PATTERN
MOV
AVG CROSSOVER MACD RSI VOLUME
OVERALL
DECISION
HCL
TECH BUY SELL BUY BUY BUY BUY BUY
The chart pattern is conveying a higher highs pattern . This is a positive trend. That indicates it is
bullish and therefore it conveys that the decision is buy. For this stock the RSI is 50 which
indicates a bullish trend. The Volume indicate a bullish trend. Though the average volume traded
is a bit on the lower side in the recent months a high volume is being traded. This is a positive
sign. The Simple moving average conveys that the stock is bearish as a full candle formed was
only seen below the SMA line. The Moving Average Crossover also coveys a bullish sign as the
9 day moving average line is above the 27 day maving average line. The MACD indicator gives
a Bullish sign as the MACD has a positive value it also indicates that the stock is bullish. As,
five out of six factors considered convey that the stock is bullish, the overall decision is that the
Grasim stock is to be bought.
4. MAHINDRA AND MAHINDRA
SCRIPT PATTERN
MOV
AVG CROSSOVER MACD RSI VOLUME
OVERALL
DECISION
M&M BUY BUY SELL BUY BUY SELL BUY
The chart pattern conveys that the overall trend is bullish. But a slight fall in the recent past was
seen , later though a recovery was also seen. If it would touch the 820 mark, that acts as a first
resistance level and the stock turns bearish. So, here as recovery was seen already the stock is
considered to be bullish. For this stock the RSI is abobe 30 which indicates a bullish trend. The
Volume indicate a bullish trend too. Though the average volume traded is a bit on the lower side
in the recent months a high volume is being traded. This is a positive sign. The Simple moving
average conveys that the stock is bullish as a full candle formed was only seen above the SMA
line. The Moving Average Crossover also coveys a bearish sign as the 9 day moving average line
is above the 27 day maving average line. The MACD indicator gives a Bullish sign as the
MACD has a positive value it also indicates that the stock is bullish. As, five out of six factors
considered convey that the stock is bullish, the overall decision is that the stock is to be bought.
5. RANABAXY LABORATORIES
SCRIPT
PATTER
N
MOV
AVG
CROSSOVE
R MACD RSI VOLUME
OVERALL
DECISION
RANBAX
Y SELL SELL SELL SELL BUY BUY SELL
Analysis of the stock:
The chart displays a lower lows pattern of the stock’s graph. It means it is bearish. The RSI is
below 70. The stock is considered to be in bullish zone. MACD is negative and at -13.86, which
indicates the stock is bearish. The Simple moving average conveys that the stock is bearish as a
full candle formed was only seen below the SMA line. The Moving Average Crossover also
coveys a bearish sign as the 9 day moving average line is below the 27 day moving average line.
Very high volume was traded recently clearly indicating the bullish nature of the stock. As, four
out of six factors considered convey that the stock is bullish, the overall decision is that the stock
is to sold.
6. SUN PHARMA
SCRIPT
PATTER
N
MOV
AVG
CROSSOV
ER
MAC
D
VOLUM
E
OVERALL
DECISION
SUN
PHARM
A BUY BUY SELL BUY SELL BUY
Analysis of Data:
For this stock the RSI is above 30 which indicates a buy decision. The chart pattern is conveying
a positive trend. That indicates it is bullish and therefore it conveys that the decision is buy. The
Volume is less as the trade has been too little over the past, so it gives a bearish signal. The
Simple moving average conveys that the stock is bearish as a full candle formed was only seen
above the SMA line. The Moving Average Crossover also coveys a bearish sign as the 9 day
moving average line is below the 27 day moving average line. The MACD indicator gives a
Bullish sign as the MACD has a positive value it also indicates that the stock is bullish. As, four
out of six factors considered convey that the stock is bullish, the overall decision is that the Sun
Pharma stock is to be bought.
7. GRASIM
SCRIPT PATTER MOV CROSSOVE MACD RSI VOLUME OVERALL
N AVG R DECISION
GRASI
M BUY SELL SELL BUY BUY BUY BUY
The chart pattern is conveying a positive trend. That indicates it is bullish and therefore it
conveys that the decision is buy. For this stock the RSI is around 30 which indicates a bullish
trend. Actually this signal can be considered to be a bit weak as the RSI may come down to
below 30 very fast. The Volume is high as the trade has been good and above average for the
past few months, so it gives a bullish signal. The Simple moving average conveys that the stock
is bearish as a full candle formed was only seen below the SMA line. The Moving Average
Crossover also coveys a bullish sign as the 9 day moving average line is below the 27 day
maving average line. The MACD indicator gives a Bullish sign as the MACD has a positive
value it also indicates that the stock is bullish. As, four out of six factors considered convey that
the stock is bullish, the overall decision is that the Grasim stock is to be bought.
8. TATA MOTORS
SCRIPT PATTERN
MOV
AVG CROSSOVER MACD RSI VOLUME
OVERALL
DECISION
TATA
MOTOR
S BUY
SEL
L SELL BUY
BU
Y BUY BUY
The graph stands above 300 at present. But a weak trend was slightly shown recently although
the stock was bullish all the time. If in future ince if the graph touches the 260 marks, it acts as a
resistance level for the stock to turn bearish. So, as of now the chart pattern conveys it is a
bullish stock. For this stock the RSI is above 30 which indicates a bullish trend. The Volume
indicate a bullish trend too as higher volumes were traded recently. The Simple moving average
conveys that the stock is bearish as a full candle formed was only seen below the SMA line. The
Moving Average Crossover also coveys a bearish sign as the 9 day moving average line is above
the 27 day moving average line. The MACD indicator gives a Bullish sign as the MACD has a
positive value it also indicates that the stock is bullish. As, four out of six factors considered
convey that the stock is bullish, the overall decision is that the stock is to be bought.
9. AMBUJA CEMENT
SCRIPT
PATTER
N
MOV
AVG CROSSOVER MACD RSI VOLUME
OVERALL
DECISION
AMBUJ
A CEM BUY BUY NONE BUY BUY SELL BUY
Though the graph conveys a flat trend, the stock is seen to gain slight strength in the last one
month. But of the hraph hits the 190 mark again which acts as resistance, it would drop to a
stron resistance2 which is at 180 and totally turns bearish. SO, as of now it is considered to be
positive because of the slight recovey shown. For this stock the RSI is above 30 which indicates
a bullish trend. The Volume indicates a bearish trend as lesser volumes were traded recently. The
Simple moving average conveys that the stock is bearish as a full candle formed was only seen
below the SMA line. The Moving Average Crossover also coveys no sign as the 9 day moving
average line is meets the 27 day moving average line. The MACD indicator gives a Bullish sign
as the MACD has a positive value it also indicates that the stock is bullish. As, four out of six
factors considered convey that the stock is bullish, the overall decision is that the stock is to be
bought.
10. KOTAK MAHINDRA BANK
SCRIPT PATTERN
MOV
AVG
CROSSOVE
R MACD RSI VOLUME
OVERALL
DECISION
KOTAK
BANK BUY BUY NONE BUY
BU
Y SELL BUY
The chart displays a higher high pattern of the stock’s graph. It means it is bullish. The RSI is
nearer to 70. This is always dangerous. But asit still not has crossed 70, the stock is considered to
be in bullish zone. MACD is 5.11 which which indicates the stock is bullish. The Simple
moving average conveys that the stock is bullish as a full candle formed was only seen above the
SMA line. The Moving Average Crossover also coveys no sign as the 9 day moving average line
is aligned with the 27 day moving average line. Very high volumes were traded recently clearly
indicating the bullish nature of the stock. As, four out of six factors considered convey that the
stock is bullish, the overall decision is that the stock is to be bought.
CONCLUSION
The project gives an exposure to the Securities Market in India. The components of the securities
market like the Pimary Market, Secondary Market and Derivative Market are known in detail.
Learning form the project includes understanding the different types of Technical indicators
available for performing technical analysis of stocks. How to make use of each indicator is also
being explained. Various factors which affect the stock market like the Economic growth, Lower
interest rates, Stability, Confidence & Expectations, Bandwagon effect, related markets were
also highlighted.
The Analysis of the CNX NIFTY Stocks has been done as a part of the project. The Analysis
concluded that the majority of the stocks could not get very strong indications i.e. to buy or to
sell. Only two stocks namely Maruthi Suzuki and Dr. Reddy’s laboratories are the stocks with
very strong bullish trends. The six technical tools considered gave the same result that the stock
is bullish for both of. Then the stocks like HCL Tech and Mahindra & Mahindra had five
Technical indicators alone giving out the same result as bullish. Then the rest of the stocks had
either four indicators or three indicators in favor of a same result. Amongst the stocks selected,
the top ten stocks recommended for investment are Maruthi Suzuki, Dr. Reddys, Hcl Tech,
Mahindra Finance, Ranbaxy Laboratories, Sun Pharma, Grasim, Tata Motors, Ambuja Cement
and Kotak Mahindra Bank. Amongst these top ten stocks recognized, only there is one stock i.e.
Ranbaxy laboratories which is having a bearish trend. The rest of the stocks are bullish only.
This conveys that the overall market is very bullish and much favorable for investments.
Of the total 50 stocks in the S&P CNX NIFTY, 32 stocks are bullish and 11 stocks are bearish.
The remaining seven stocks conveyed no result. Their performance is stable. Here 64% of the
stocks are bullish while only 22% of the stocks are bearish. So, not alone the top ten stocks, but
the overall index also conveys that the overall market is bullish. Even investing in the bullish
stocks is gainful as one use the short option available carefully to gain profits.
So, the S&P CNX NIFTY stocks are the one of the best investment options available as the gains
could be very high. Especially investing in the bullish stocks would be very beneficial.
6.3 Suggestions for further study
The project was confined only to the study of derivatives strategies in the Indian Market.
Apart from the analysis done, stocks can be analyzed on the basis of various other
indicators of technical analysis or on the basis of the fundamental analysis.
The index considered here is not alone the best investment avenue available. Even other
stock of other indexes may yield good returns.
The technical indicators can be utilized even for the study of Derivatives market and even
for the commodities market etc.
The opportunity cost of capital and the returns from investing elsewhere can be
calculated and compared with the investment made in stocks.
Apart from the factors explained in the project which would effect the stock market,
many other factors also may exist.
BIBILIOGRAPHY
Books:
A.K.Sharma & G.S. Batra (2008), Indian Stock Market. Deep & Deep Publications Pvt.
Ltd
Ajay Shah, Susan Thomas, Michael Gorham (2008), India’s Financial Markets. Elsevier
Bharati V. Pathak, Pathak Bharati V. (2011), The Indian Financial System, Third Edition,
Dorling Kindersley (india) Pvt.ltd
Charles Kirkpatrick II, Julie R. Dahlquist (2011), Technical Analysis, Second Edition.
Pearson Education Inc.
Robert D. Edwards, John Magee, W.H.C. Bassetti, (2007), Tecjnical Analysis of Stock
trends, Ninth Edition. CRC Press
V. Raghunathan, Prabina Rajib (2007), Stock Exchanges, Investments and Derivatives,
Third Edition, Tata McGraw-Hill Publishing Company limited
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http://www.nseindia.com/products/content/equities/equities/equities.htm
http://www.moneycontrol.com/india/stockpricequote/autocarsjeeps/marutisuzukiindia/MS24
http://nseguide.com/stocksearch.php?name=reliance
http://www.indiainfoline.com/
http://www.nseindia.com/content/indices/ind_cnx_nifty.pdf
http://www.sharetipsinfo.com/factoraffecting-stockprice.html
http://smallbusiness.chron.com/economic-factors-affect-stock-market-3942.html#gsc.tab=0
http://nifty50live.stockforyouindia.com/
http://www.investopedia.com/university/technical/
http://www.technicalanalysisofstocks.in/
http://www.investing.com/technical/moving-averages
http://www.niftydirect.com/nsebse/market-gyan/Learning%20Session%205th.pdf