Equity Analysis Banking Sectors Using of Technical Analysis.-shiram Insight

8/17/2019 Equity Analysis Banking Sectors Using of Technical Analysis.-shiram Insight

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CHAPTER 1

INTRODUCTION

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TECHNICAL ANALYSIS ON STOCK MARKET

INTRODUCTION:

Security analysis is the analysis of traceable financial instruments called securities. These can

be classified into debt securities, equities, or some hybrid of the two. More broadly, futures

contracts and traceable credit derivatives are sometimes included. Security analysis is

typically divided into fundamental analysis, which relies upon the examination of

fundamental business factors such as financial statements, and technical analysis, which

focuses upon price trends and momentum. Quantitative analysis may use indicators from both

areas.

SCOPE OF THE STUDY

• The study can help in analyzing rowth in security mar!et prices using technical

analysis.

• "ompanies are loo!ing to get a competitive edge.

•

Quic! returns are possible for short term profits in selected companies.• #uture growth of selected company$s price.

OBJECTIVES OF THE STUDY

The basic idea behind underta!ing security forecast pro%ect is to gain !nowledge about

security forecasting

• To study the basic concept of security analysis using technical analysis.

• To study the technical analysis tool &S'.

• To understand the practical considerations and ways of considering security price .

• To analyze different security chart patterns.

• To manage the security forecasting prices.

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RESEARCH METHODOLOGY

Technica ana!"i"

Technical analysis is a method of predicting price movements and future mar!et trends by

studying charts of past mar!et action. Technical analysis is concerned with what has actually

happened in the mar!et, rather than what should happen and ta!es into account the price of

instruments and the volume of trading, and creates charts from that data to use as the primary

tool. (ne ma%or advantage of technical analysis is that experienced analysts can follow many

mar!ets and mar!et instruments simultaneously.

Technica ana!"i" i" #$i% &n %h'ee e""en%ia ('inci(e":

). Mar!et action discounts everything* This means that the actual price is a reflection of

everything that is !nown to the mar!et that could affect it, for example, supply and demand,

political factors and mar!et sentiment. +owever, the pure technical analyst is only concerned

with price movements, not with the reasons for any changes.

. -rices move in trends Technical analysis is used to identify patterns of mar!et behavior

that have long been recognized as significant. #or many given patterns there is a high

probability that they will produce the expected results. lso, there are recognized patterns

that repeat themselves on a consistent basis.

/. +istory repeats itself Security chart patterns have been recognized and categorized for over

)00 years and the manner in which many patterns are repeated leads to the conclusion that

human psychology changes little over time.

Security charts are based on mar!et action involving price. There are five categories in

Security technical analysis theory1

• 'ndicators 2oscillators, e.g.1 &elative Strength 'ndex 2&S'3

• 4umber theory 2#ibonacci numbers, ann numbers3

• 5aves 26lliott wave theory3

• aps 2high7low, open7closing3

• Trends 2following moving average3.

S&)e )a*&' %echnica ana!"i" %&&" a'e +e"c'i#e+ #e&,:

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Rea%i-e S%'en.%h In+e/ 0RSI:

The &S' measures the ratio of up7moves to down7moves and normalizes the calculation so

that the index is expressed in a range of 07)00. 'f the &S' is 80 or greater, then the instrument

is assumed to be overbought 2a situation in which prices have risen more than mar!et

expectations3. n &S' of /0 or less is ta!en as a signal that the instrument may be oversold 2a

situation in which prices have fallen more than the mar!et expectations3.

S%&cha"%ic O"cia%&':

This is used to indicate overbought9oversold conditions on a scale of 07)00:. The indicator

is based on the observation that in a strong up trend, period closing prices tend to concentrate

in the higher part of the period;s range. "onversely, as prices fall in a strong down trend,

closing prices tend to be near to the extreme low of the period range. Stochastic calculations

produce two lines, :< and := that are used to indicate overbought9oversold areas of a chart.

=ivergence between the stochastic lines and the price action of the underlying instrument

gives a powerful trading signal.

Sa)(e "i2e 17/ Security products selected for 4S69>S6 .?es >an! , +=#" >an! nd

ndhra >an!

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LIMITATIONS OF THE STUDY:

• The analysis was purely based on the secondary data. So, any error in the secondary

data might also affect the study underta!en.

• The currency future is new concept and topic related boo! was not available in library

and mar!et.

• This study has been conducted purely to understand 6quity analysis for investors.

• The study is restricted to three companies based on technical analysis.

• The study is limited to the companies having equities.

• =etailed study of the topic was not possible due to limited size of the pro%ect.

• There was a constraint with regard to time allocation for the research study i.e. for a

period of @A days.

• Suggestions and conclusions are based on the limited data of B M(4T+S.

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CHAPTER34

REVIE5 OF LITERATURE

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'nvestment success is pretty much a matter of careful selection and timing of stoc! purchases

coupled with perfect matching to an individual$s ris! tolerance. 'n order to carry out

selection, timing and matching actions an investor must conduct deep security analysis.

'nvestors purchase equity shares with two basic ob%ectivesC

). To ma!e capital profits by selling shares at higher prices.

. To earn dividend income.

These two factors are affected by a host of factors. n investor has to carefully understand

and analyze all these factors. There are basically two approaches to study security prices and

valuation i.e. fundamental analysis and technical analysis.

The value of common stoc! is determined in large measure by the performance of the firm

that issued the stoc!. 'f the company is healthy and can demonstrate strength and growth, the

value of the stoc! will increase. 5hen values increase then prices follow and returns on an

investment will increase. +owever, %ust to !eep the savvy investor on their toes, the mix is

complicated by the ris! factors involved. #undamental analysis examines all the dimensions

of ris! exposure and the probabilities of return, and merges them with broader economic

analysis and greater industry analysis to formulate the valuation of a stoc!.

FUNDAMENTAL ANALYSIS:

#undamental analysis is a method of forecasting the future price movements of a financial

instrument based on economic, political, environmental and other relevant factors and

statistics that will affect the basic supply and demand of whatever underlies the financial

instrument. 't is the study of economic, industry and company conditions in an effort to

determine the value of a company$s stoc!. #undamental analysis typically focuses on !ey

statistics in company$s financial statements to determine if the stoc! price is correctly valued.

The term simply refers to the analysis of the economic well7being of a financial entity as

opposed to only its price movements.

#undamental analysis is the cornerstone of investing. The basic philosophy underlying the

fundamental analysis is that if an investor invests re.) in buying a share of a company, how

much expected returns from this investment he has.

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The fundamental analysis is to appraise the intrinsic value of a security. 't insists that no one

should purchase or sell a share on the basis of tips and rumours. The fundamental approach

calls upon the investors to ma!e his buy or sell decision on the basis of a detailed analysis of

the information about the company, about the industry, and the economy. 't is also !nown as

Dtop7down approachE. This approach attempts to study the economic scenario, industry

position and the company expectations and is also !nown as 6ec&n&)ic3in+$"%'!3c&)(an!

a(('&ach 0EIC a(('&ach7.

Thus the EIC a(('&ach involves three steps1

). 6conomic analysis

. 'ndustry analysis

/. "ompany analysis

18 ECONOMIC ANALYSIS:

The level of economic activity has an impact on investment in many ways. 'f the economy

grows rapidly, the industry can also be expected to show rapid growth and vice versa. 5hen

the level of economic activity is low, stoc! prices are low, and when the level of economic

activity is high, stoc! prices are high reflecting the prosperous outloo! for sales and profits of

the firms. The analysis of macroeconomic environment is essential to understand the

behaviour of the stoc! prices.

The commonly analyzed macro economic factors are as follows1

G'&"" D&)e"%ic P'&+$c% 0GDP: =- indicates the rate of growth of the economy. 't

represents the aggregate value of the goods and services produced in the economy. 't consists

of personal consumption expenditure, gross private domestic investment and government

expenditure on goods and services and net exports of goods and services. The growth rate of

economy points out the prospects for the industrial sector and the return investors can expect

from investment in shares. The higher growth rate is more favourable to the stoc! mar!et.

Sa-in." an+ in-e"%)en%: 't is obvious that growth requires investment which in turn requires

substantial amount of domestic savings. Stoc! mar!et is a channel through which the savings

are made available to the corporate bodies. Savings are distributed over various assets li!e

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equity shares, deposits, mutual funds, real estate and bullion. The savings and investment

patterns of the public affect the stoc! to a great extent.

In9a%i&n: long with the growth of =-, if the inflation rate also increases, then the real

growth would be very little. The effects of inflation on capital mar!ets are numerous. n

increase in the expected rate of inflation is expected to cause a nominal rise in interest rates.

lso, it increases uncertainty of future business and investment decisions. s inflation

increases, it results in extra costs to businesses, thereby squeezing their profit margins and

leading to real declines in profitability.

In%e'e"% 'a%e": The interest rate affects the cost of financing to the firms. decrease in

interest rate implies lower cost of finance for firms and more profitability. More money is

available at a lower interest rate for the bro!ers who are doing business with borrowed

money. vailability of cheap funds encourages speculation and rise in the price of shares.

Ta/ "%'$c%$'e: 6very year in March, the business community eagerly awaits the

overnment$s announcement regarding the tax policy. "oncessions and incentives given to a

certain industry encourage investment in that particular industry. Tax relief$s given to savings

encourage savings. The type of tax exemption has impact on the profitability of the

industries.

In9'a"%'$c%$'e 9acii%ie": 'nfrastructure facilities are essential for the growth of industrial and

agricultural sector. wide networ! of communication system is a must for the growth of the

economy. &egular supply of power without any power cut would boost the production.

>an!ing and financial sectors also should be sound enough to provide adequate support to the

industry. ood infrastructure facilities affect the stoc! mar!et favourably.

48 INDUSTRY ANALYSIS

n industry is a group of firms that have similar technological structure of production and

produce similar products and 'ndustry analysis is a type of business research that focuses on

the status of an industry or an industrial sector 2a broad industry classification, li!e

FmanufacturingF3. 'rrespective of specific economic situations, some industries might be

expected to perform better, and share prices in these industries may not decline as much as in

other industries. This identification of economic and industry specific factors influencing

share prices will help investors to identify the shares that fit individual expectations

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In+$"%'! Li9e C!ce: The industry life cycle theory is generally attributed to Gulius

rodens!y. The life cycle of the industry is separated into four well defined stages.

• Pi&nee'in. "%a.e: The prospective demand for the product is promising in this stage

and the technology of the product is low. The demand for the product attracts many

producers to produce the particular product. There would be severe competition and

only fittest companies survive this stage. The producers try to develop brand name,

differentiate the product and create a product image. 'n this situation, it is difficult to

select companies for investment because the survival rate is un!nown.

Ra(i+ .'&,%h "%a.e: This stage starts with the appearance of surviving firms from

the pioneering stage. The companies that have withstood the competition grow

strongly in mar!et share and financial performance. The technology of the productionwould have improved resulting in low cost of production and good quality products.

The companies have stable growth rate in this stage and they declare dividend to the

shareholders. 't is advisable to invest in the shares of these companies.

Ma%$'i%! an+ "%a#ii2a%i&n "%a.e: the growth rate tends to moderate and the rate of

growth would be more or less equal to the industrial growth rate or the gross domestic

product growth rate. Symptoms of obsolescence may appear in the technology. To

!eep going, technological innovations in the production process and products should

be introduced. The investors have to closely monitor the events that ta!e place in the

maturity stage of the industry.

Decine "%a.e: demand for the particular product and the earnings of the companies in

the industry decline. 't is better to avoid investing in the shares of the low growth

industry even in the boom period. 'nvestment in the shares of these types of

companies leads to erosion of capital.

G'&,%h &9 %he in+$"%'!: The historical performance of the industry in terms of growth and

profitability should be analyzed. The past variability in return and growth in reaction to

macro economic factors provide an insight into the future.

Na%$'e &9 c&)(e%i%i&n: 4ature of competition is an essential factor that determines the

demand for the particular product, its profitability and the price of the concerned company

scrip. The companies; ability to withstand the local as well as the multinational competition

counts much. 'f too many firms are present in the organized sector, the competition would be

severe. The competition would lead to a decline in the price of the product. The investor

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before investing in the scrip of a company should analyze the mar!et share of the particular

company;s product and should compare it with the top five companies.

S5OT Ana!"i": S5(T analysis represents the strength, wea!ness, opportunity and threat

for an industry. 6very investor should carry out a S5(T analysis for the chosen industry.

Ta!e for instance, increase in demand for the industry$s product becomes its strength,

presence of numerous players in the mar!et, i.e. competition becomes the threat to a

particular company. The progress in & H = in that industry is an opportunity and entry of

multinationals in the industry is a threat. 'n this way the factors are to be arranged and

analyzed.

8 COMPANY ANALYSIS:

'n the company analysis the investor assimilates the several bits of information related to the

company and evaluates the present and future values of the stoc!. The ris! and return

associated with the purchase of the stoc! is analyzed to ta!e better investment decisions. The

present and future values are affected by a number of factors.

C&)(e%i%i-e e+.e &9 %he c&)(an!: Ma%or industries in 'ndia are composed of hundreds of

individual companies. Though the number of companies is large, only few companies control

the ma%or mar!et share. The competitiveness of the company can be studied with the help of

the followingC

Ma';e% "ha'e: The mar!et share of the annual sales helps to determine a company$s relative

competitive position within the industry. 'f the mar!et share is high, the company would be

able to meet the competition successfully. The companies in the mar!et should be compared

with li!e product groups otherwise, the results will be misleading.

G'&,%h &9 "ae": The rapid growth in sales would !eep the shareholder in a better position

than one with stagnant growth rate. 'nvestors generally prefer size and growth in sales

because the larger size companies may be able to withstand the business cycle rather than the

company of smaller size.

S%a#ii%! &9 "ae": 'f a firm has stable sales revenue, it will have more stable earnings. The

fall in the mar!et share indicates the declining trend of company, the sales are stable. +ence

the stability of sales should be compared with its mar!et share and the competitor$s mar!et

share.

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Ea'nin." &9 %he c&)(an!: Sales alone do not increase the earnings but the costs and

expenses of the company also influence the earnings. #urther, earnings do not always

increase with increase in sales. The company$s sales might have increased but its earnings per

share may decline due to rise in costs. +ence, the investor should not only depend on the

sales, but should analyze the earnings of the company.

Financia ana!"i": The best source of financial information about a company is its own

financial statements. This is a primary source of information for evaluating the investment

prospects in the particular company$s stoc!. #inancial statement analysis is the study of a

company$s financial statement from various viewpoints. The statement gives the historical

and current information about the company$s operations. +istorical financial statement helps

to predict the future and the current information aids to analyze the present status of the

company. The two main statements used in the analysis are >alance sheet and -rofit and Ioss

ccount.

The balance sheet is one of the financial statements that companies prepare every year for

their shareholders. 't is li!e a financial snapshot, the company;s financial situation at a

moment in time. 't is prepared at the year end, listing the company;s current assets and

liabilities. 't helps to study the capital structure of the company. 't is better for the investor to

avoid a company with excessive debt component in its capital structure.

#rom the balance sheet, liquidity position of the company can also be assessed with the

information on current assets and current liabilities.

Ra%i& ana!"i": &atio is a relationship between two figures expressed mathematically.

#inancial ratios provide numerical relationship between two relevant financial data. #inancial

ratios are calculated from the balance sheet and profit and loss account. The relationship can

be either expressed as a percent or as a quotient. &atios summarize the data for easy

understanding, comparison and interpretations.

&atios for investment purposes can be classified into profitability ratios, turnover ratios, and

leverage ratios. -rofitability ratios are the most popular ratios since investors prefer to

measure the present profit performance and use this information to forecast the future

strength of the company. The most often used profitability ratios are return on assets, price

earnings multiplier, price to boo! value, price to cash flow, and price to sales, dividend yield,

return on equity, present value of cash flows, and profit margins.

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a Re%$'n &n A""e%" 0ROA:

&( is computed as the product of the net profit margin and the total asset turnover ratios.

ROA < 0Ne% P'&9i%=T&%a inc&)e / 0T&%a inc&)e=T&%a A""e%"

This ratio indicates the firm;s strategic success. "ompanies can have one of two strategies1

cost leadership, or product differentiation. &( should be rising or !eeping pace with the

company;s competitors if the company is successfully pursuing either of these strategies, but

how &( rises will depend on the company;s strategy. &( should rise with a successful

cost leadership strategy because the company$s increasing operating efficiency. n example

is an increasing, total asset, turnover ratio as the company expands into new mar!ets,

increasing its mar!et share. The company may achieve leadership by using its assets more

efficiently. 5ith a successful product differentiation strategy, &( will rise because of a

rising profit margin.

# Re%$'n &n In-e"%)en% 0ROI:

&(' is the return on capital invested in business, i.e., if an investment &s ) crore in men,

machines, land and material is made to generate &s. A la!hs of net profit, then the &(' is

A:. The computation of return on investment is as follows1

Re%$'n &n In-e"%)en% 0ROI < 0Ne% ('&9i%=E>$i%! in-e"%)en%" / 1??

s this ratio reveals how well the resources of a firm are being used, higher the ratio, better

are the results. The return on shareholder$s investment should be compared with the return of

other similar firms in the same industry. The inert7firm comparison of this ratio determines

whether the investments in the firm are attractive or not as the investors would li!e to invest

only where the return is higher.

c Re%$'n &n E>$i%!:

&eturn on equity measures how much an equity shareholder;s investment is actually earning.

The return on equity tells the investor how much the invested rupee is earning from the

company. The higher the number, the better is the performance of the company and suggests

the usefulness of the pro%ects the company has invested in.

The computation of return on equity is as follows1

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Re%$'n &n e>$i%! < 0Ne% ('&9i% %& &,ne'"=-a$e &9 %he "(eci9ic &,ne'@"

C&n%'i#$%i&n %& %he #$"ine"" / 1??

The ratio is more meaningful to the equity shareholders who are invested to !now profits

earned by the company and those profits which can be made available to pay dividend to

them.

+ Ea'nin." (e' Sha'e 0EPS31

This ratio determines what the company is earning for every share. #or many investors,

earnings are the most important tool. 6-S is calculated by dividing the earnings 2net profit3

by the total number of equity shares.

The computation of 6-S is as follows1

Ea'nin." (e' "ha'e < Ne% ('&9i%=N$)#e' &9 "ha'e" &$%"%an+in.

The 6-S is a good measure of profitability and when compared with 6-S of similar other

companies, it gives a view of the comparative earnings or earnings power of a firm. 6-S

calculated for a number of years indicates whether or not earning power of the company has

increased.

e Di-i+en+ (e' Sha'e 0DPS:

The extent of payment of dividend to the shareholders is measured in the form of dividend

per share. The dividend per share gives the amount of cash flow from the company to the

owners and is calculated as follows1

Di-i+en+ (e' "ha'e < T&%a +i-i+en+ (a!)en% = N$)#e' &9 "ha'e" &$%"%an+in.

The payment of dividend can have several interpretations to the shareholder. The distribution

of dividend could be thought of as the distribution of excess profits9abnormal profits by the

company. (n the other hand, it could also be negatively interpreted as lac! of investment

opportunities. 'n all, dividend payout gives the extent of inflows to the shareholders from the

company.

9 Di-i+en+ Pa!&$% Ra%i&:

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#rom the profits of each company a cash flow called dividend is distributed among its

shareholders. This is the continuous stream of cash flow to the owners of shares, apart from

the price differentials 2capital gains3 in the mar!et. The return to the shareholders, in the form

of dividend, out of the company;s profit is measured through the payout ratio. The payout

ratio is computed as follows1

Pa!&$% Ra%i& < 0Di-i+en+ (e' "ha'e = Ea'nin." (e' "ha'e 1??

The percentage of payout ratio can also be used to compute the percentage of retained

earnings. The profits available for distribution are either paid as dividends or retained

internally for business growth opportunities. +ence, when dividends are not declared, the

entire profit is ploughed bac! into the business for its future investments.

. Di-i+en+ Yie+:

=ividend yield is computed by relating the dividend per share to the mar!et price of the

share. The mar!et place provides opportunities for the investor to buy the company;s share at

any point of time. The price at which the share has been bought from the mar!et is the actual

cost of the investment to the shareholder. The mar!et price is to be ta!en as the cum7dividend

price. =ividend yield relates the actual cost to the cash flows received from the company. The

computation of dividend yield is as follow

Di-i+en+ !ie+ < 0Di-i+en+ (e' "ha'e = Ma';e% ('ice (e' "ha'e 1??

+igh dividend yield ratios are usually interpreted as undervalued companies in the mar!et.

The mar!et price is a measure of future discounted values, while the dividend per share is the

present return from the investment. +ence, a high dividend yield implies that the share has

been under priced in the mar!et. (n the other hand a low dividend yield need not be

interpreted as overvaluation of shares. company that does not pay out dividends will not

have a dividend yield and the real measure of the mar!et price will be in terms of earnings

per share and not through the dividend payments.

h P'ice=Ea'nin." Ra%i& 0P=E:

The -96 multiplier or the price earnings ratio relates the current mar!et price of the share to

the earnings per share. This is computed as follows1

P'ice=ea'nin." 'a%i& < C$''en% )a';e% ('ice = Ea'nin." (e' "ha'e

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This ratio is calculated to ma!e an estimate of appreciation in the value of a share of a

company and is widely used by investors to decide whether or not to buy shares in a

particular company. Many investors prefer to buy the company;s shares at a low -96 ratio

since the general interpretation is that the mar!et is undervaluing the share and there will be a

correction in the mar!et price sooner or later. very high -96 ratio on the other hand implies

that the company;s shares are overvalued and the investor can benefit by selling the shares at

this high mar!et price.

i De#%3%&3E>$i%! Ra%i&:

=ebt76quity ratio is used to measure the claims of outsiders and the owners against the firm$s

assets.

De#%3%&3e>$i%! 'a%i& < O$%"i+e'" F$n+" = Sha'eh&+e'" F$n+"

The debt7equity ratio is calculated to measure the extent to which debt financing has been

used in a business. 't indicates the proportionate claims of owners and the outsiders against

the firm$s assets. The purpose is to get an idea of the cushion available to outsiders on the

liquidation of the firm.

TECHNICAL ANALYSIS:

Technical analysis refers to the study of mar!et generated data li!e prices H

volume to determine the future direction of prices movements. Technical analysis mainly

see!s to predict the short term price travels. 't is important criteria for selecting the

company to invest. 't also provides the base for decision7ma!ing in investment. The one

of the most frequently used yardstic! to chec! H analyze underlying price progress. #or

that matter a verity of tools was consider.

This Technical analysis is helpful to general investor in many ways. 't provides

important H vital information regarding the current price position of the company.

Technical analysis involves the use of various methods for charting, calculating H

interpreting graph H chart to assess the performances H status of the price. 't is the tool

of financial analysis, which not only studies but also reflecting the numerical H graphical

relationship between the important financial factors.

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The focus of technical analysis is mainly on the internal mar!et data, i.e. prices H

volume data. 't appeals mainly to short term traders. 't is the oldest approach to equity

investment dating bac! to the late )Jth century.

Ba"ic ('e)i"e" &9 %echnica ana!"i":

18 Mar!et prices are determined by the interaction of supply H demand forces.

48 Supply H demand are influenced by variety of supply H demand affiliated

factors both rational H irrational.

8 These include fundamental factors as well as psychological factors.

8 >arring minor deviations stoc! prices tend to move in fairly persistent trends.

8 Shifts in demand H supply bring about change in trends.

8 This shift s can be detected with the help of charts of manual H computerized

action, because of the persistence of trends H patterns analysis of past mar!et

data can be used to predict future prices behaviors.

D'a,#ac;" = i)i%a%i&n" &9 %echnica ana!"i":

) Technical analysis does not able to explain the rezones behind the

employment or selection of specific tool of Technical analysis. The technical analysis failed to signal an uptrend or downtrend in time.

/ The technical analysis must be a self defeating proposition. s more H more

people use, employ it the value of such analysis trends to reduce.

U"$a! %he 9&&,in. %&&" in"%'$)en%" a'e $"e+ %& +& %he %echnica ana!"i":

P'ice S%!e"

-rice in a chart can be displayed in three styles1 bar, line, and candlestic!.

Ba': 't gives the detailed information about every aspect.

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Line:

line chart simply connects the closing prices from one period to the next. This

type of chart is ideal for securities with no high or low price data i.e., mutual funds or that

is even with the equity in case of base price.

Ja(ane"e Can+e"%ic;: candlestic! is blac! if the closing price is lower than the

opening price. candlestic! is white if the closing price is higher than the opening price.

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P'ice Pa%%e'n":

O-e'-ie,:

basic principle of technical analysis is that security prices move in trends. 5ealso !now that trends do not last forever. They eventually change direction and when

they do, they rarely do so on a dime. 'nstead, prices typically decelerate, pause, and then

reverse. These phases occur as investors form new expectations and by doing so,

shift the security;s supply9demand. .

The changing of expectations often causes price patterns to emerge. lthough no

two mar!ets are identical, their price patterns are often very similar. -redictable price

behavior often follows these price patterns. "hart patterns can last from a few days to

many months or even years. enerally spea!ing, the longer a pattern ta!es to form, the

more dramatic the ensuing prices move.

Hea+ an+ Sh&$+e'":

The +ead7and7Shoulders price pattern is the most reliable and well7!nown chart

pattern. 't gets its name from the resemblance of a head with two shoulders on either

side. The reason this reversal pattern is so common is due to the manner in which trends

typically reverse. .n up7trend is formed as prices ma!e higher7highs and higher7lows in a stair7step

fashion. The trend is bro!en when this upward climb ends. s you can see in the

illustration 2'ntel, '4T"3, the Fleft shoulderF and the FheadF are the last two higher7highs.

The right shoulder is created as the bulls try to push prices higher, but are unable to do

so. This signifies the end of the up7trend. "onfirmation of a new down7trend occurs

when the Fnec!lineF is penetrated

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=uring a healthy up7trend, volume should increase during each rally. sign that

the trend is wea!ening occurs when the volume accompanying rallies is less than the

volume accompanying the preceding rally. 'n a typical +ead7and7Shoulders pattern,

volume decreases on the head and is especially light on the right shoulder.

#ollowing the penetration of the nec!line, it is very common for prices to return

to the nec!line in a last effort to continue the up7trend. 'f prices are then unable to rise

above the nec!line, they usually decline rapidly on increased volume. n inverse 2or

upside7down3 +ead7and7Shoulders pattern often coincides with mar!et bottoms. s with

a normal +ead7and7Shoulders pattern, volume usually decreases as the pattern is formed

and then increases as prices rise above the nec!line

R&$n+in. T&(" an+ B&%%&)":&ounding tops occur as expectations gradually shift from bullish to bearish. The

gradual, yet steady shift forms a rounded top. &ounding bottoms occur as expectations

gradually shift from bearish to bullish.Kolume during both rounding tops and rounding

bottoms often mirrors the bowl7li!e shape of prices during a rounding bottom. Kolume,

which was high during the previous trend, decreases as expectations shift and traders

become indecisive. Kolume then increases as the new trend is established

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D&$#e T&(" an+ B&%%&)":

+&$#e %&( occurs when prices rise to a resistance level on significant volume,

retreat, and subsequently return to the resistance level on decreased volume. -rices then

decline mar!ing the beginning of a new down7trend.

+&$#e #&%%&) has the same characteristics as a double top except it is upside

is down.

Tops T) H T are almost at the same level H trend violated the support line

formed with the help of bottom >) hence, a =ouble top reversal pattern has been formed.

To measure the li!ely downward reaction, measure the distances between the intervening

bottom H the double tops. =educt these distances from the intervening bottom H that will

be the downward target of the double top reversal pattern.

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>ottom >) H > are almost at the same level H trend violated the resistances level formed

with the help of top T) henceC a =ouble bottom reversal pattern has been formed. To measure

the li!ely upward reaction, measure the distances between the intervening top H the double

bottom. =educt these distances from the intervening top H that will be the upward target of

the double bottom reversal pattern.

Tops T), T H T/ are almost at the same level H trend violated the support line formed with

the help of bottom >) because the >) is the lowest bottom hence, a triple top reversal pattern

has been formed. To measure the li!ely downward reaction, measure the distances between

the intervening bottom H the triple tops. =educt these distances from the intervening bottom

H that will be the downward target of the triple top reversal pattern.

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>ottom >), > H >/ are almost at the same level H trend violated the resistances

level formed with the help of top T) because the T) is the heights top hence, a triple

bottom reversal pattern has been formed. To measure the li!ely upward reaction, measure

the distances between the intervening top H the triple bottom. =educt these distances

from the intervening top H that will be the upward target of the triple bottom reversal

pattern.

F&')a%i&n &9 P'ice cha'%":

price chart is a sequence of prices plotted over a specific time frame. 'n statistical terms,charts are referred to as time series plots.

(n the chart, the y7axis 2vertical axis3 represents the price scale and the x7axis 2horizontal

axis3 represents the time scale. -rices are plotted from left to right across the x7axis with the

most recent plot being the furthest right. The price plot for '>M extends from Ganuary ), )JJJ

to March )/, 000.

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Technicians, technical analysts and chartists use charts to analyze a wide array of securities

and forecast future price movements. The word FsecuritiesF refers to any tradable financial

instrument or quantifiable index such as stoc!s, bonds, commodities, futures or mar!et

indices. ny security with price data over a period of time can be used to form a chart for

analysis.

5hile technical analysts use charts almost exclusively, the use of charts is not limited to %ust

technical analysis. >ecause charts provide an easy7to7read graphical representation of a

security;s price movement over a specific period of time, they can also be of great benefit to

fundamental analysts. graphical historical record ma!es it easy to spot the effect of !ey

events on a security;s price, its performance over a period of time and whether it;s trading

near its highs, near its lows, or in between.

H&, %& Pic; a Ti)e F'a)e:

The time frame used for forming a chart depends on the compression of the data1 intraday,

daily, wee!ly, monthly, quarterly or annual data. The less compressed the data is, the more

detail is displayed.

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=aily data is made up of intraday data that has been compressed to show each day as a single

data point, or period. 5ee!ly data is made up of daily data that has been compressed to show

each wee! as a single data point. The difference in detail can be seen with the daily and

wee!ly chart comparison above. )00 data points 2or periods3 on the daily chart is equal to the

last A months of the wee!ly chart, which is shown by the data mar!ed in the rectangle. The

more the data is compressed, the longer the time frame possible for displaying the data. 'f the

chart can display )00 data points, a wee!ly chart will hold )00 wee!s 2almost years3.

daily chart that displays )00 days would represent about A months. There are about 0 trading

days in a month and about A trading days in a year. The choice of data compression and

time frame depends on the data available and your trading or investing style.

• Traders usually concentrate on charts made up of daily and intraday data to forecast

short7term price movements. The shorter the time frame and the less compressed the

data is, the more detail that is available. 5hile long on detail, short7term charts can be

volatile and contain a lot of noise. Iarge sudden price movements, wide high7low

ranges and price gaps can affect volatility, which can distort the overall picture.

• 'nvestors usually focus on wee!ly and monthly charts to spot long7term trends and

forecast long7term price movements. >ecause long7term charts 2typically )7@ years3cover a longer time frame with compressed data, price movements do not appear as

extreme and there is often less noise.

• (thers might use a combination of long7term and short7term charts. Iong7term charts

are good for analyzing the large picture to get a broad perspective of the historical

price action. (nce the general picture is analyzed, a daily chart can be used to zoom in

on the last few months.

H&, A'e Cha'%" F&')e+

5e will be explaining the construction of line, bar, candlestic! and point H figure charts.

lthough there are other methods available, these are @ of the most popular methods for

displaying price data.

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Line Cha'%:

Some investors and traders consider the closing level to be more important than the open,

high or low. >y paying attention to only the close, intraday swings can be ignored. Iine

charts are also used when open, high and low data points are not available. Sometimes only

closing data are available for certain indices, thinly traded stoc!s and intraday prices.

Ba' Cha'%:

-erhaps the most popular charting method is the bar chart. The high, low and close are

required to form the price plot for each period of a bar chart. The high and low are

represented by the top and bottom of the vertical bar and the close is the short horizontal line

crossing the vertical bar. (n a daily chart, each bar represents the high, low and close for a

particular day. 5ee!ly charts would have a bar for each wee! based on #riday;s close and the

high and low for that wee!.

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>ar charts can also be displayed using the open, high, low and close. The only difference is

the addition of the open price, which is displayed as a short horizontal line extending to the

left of the bar. 5hether or not a bar chart includes the open depends on the data available.

>ar charts can be effective for displaying a large amount of data. Lsing candlestic!s, 00 data

points can ta!e up a lot of room and loo! cluttered. Iine charts show less clutter, but do not

offer as much detail 2no high7low range3. The individual bars that ma!e up the bar chart are

relatively s!inny, which allows users the ability to fit more bars before the chart gets

cluttered. 'f you are not interested in the opening price, bar charts are an ideal method foranalyzing the close relative to the high and low. 'n addition, bar charts that include the open

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along the time scale. 6ven if the price is unchanged from day to day or wee! to wee!, a dot,

bar, or candlestic! is plotted to mar! the price action. "ontrary to this methodology, point H

figure charts are based solely on price movement, and do not ta!e time into consideration.

There is an x7axis but it does not extend evenly across the chart.

The beauty of point H figure charts is their simplicity. Iittle or no price movement is deemed

irrelevant and therefore not duplicated on the chart. (nly price movements that exceed

specified levels are recorded. This focus on price movement ma!es it easier to identify

support and resistance levels, bullish brea!outs and bearish brea!downs. This -H# article has

a more detailed explanation of point H figure charts.

P'ice Scain.:

There are two methods for displaying the price scale along the y7axis1 a'i%h)e%ic an+

&.a'i%h)ic. n arithmetic scale displays )0 points 2or dollars3 as the same vertical distance

no matter what the price level. 6ach unit of measure is the same throughout the entire scale.

'f a stoc! advances from )0 to B0 over a 7month period, the move from )0 to 0 will appear

to be the same distance as the move from 80 to B0. 6ven though this move is the same in

absolute terms, it is not the same in percentage terms.

logarithmic scale measures price movements in percentage terms. n advance from )0 to0 would represent an increase of )00:. n advance from 0 to @0 would also be )00:, as

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would an advance from @0 to B0. ll three of these advances would appear as the same

vertical distance on a logarithmic scale. Most charting programs refer to the logarithmic scale

as a semi7log scale, because the time axis is still displayed arithmetically.

The chart above uses the @th7Quarter performance of KeriSign to illustrate the difference in

scaling. (n the log scale version, the distance between A0 and )00 is the same as the distance

between )00 and 00. +owever, on the arithmetic scale, the distance between )00 and 00 is

significantly greater than the distance between A0 and )00.


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• rithmetic scales are useful when the price range is confined within a relatively tight

range.

• rithmetic scales are useful for short7term charts and trading. -rice movements

2particularly for stoc!s3 are shown in absolute dollar terms and reflect movements

dollar for dollar.

• Iog scales are useful when the price has moved significantly, be it over a short or

extended time frame

• Trend lines tend to match lows better on log scale charts.

• Iog scale charts are useful when gauging the percentage movements over a long

period of time. Iarge movements are put into better perspective.

• Stoc!s and many other securities are %udged in relative terms through the use of ratios

such as -6, -rice9&evenues and -rice9>oo!. 5ith this in mind, it also ma!es sense to

analyze price movements in percentage terms

Technical analysis was truly an arcane art before the internet boom. "hartists perform

technical analysis in their secret rooms with data that was carefully collected from

professional sources. Those were the times when stoc! prices and data did not have a medium

through which to be readily available to the public and be ran through publicly available

software to produce the charts that are available today.

Today, with internet in almost every household, technical analysis became an art anyone

could practice. "omplex charts, technical indicators and analysis that was once the sole

domain of a few highly paid wall7street analysts are now available to anyone who wants it,

often for free.Technical analysis also became lin!ed to short term aggressive trading

instruments such as stoc! options and futures because of its excellent short term predictive

nature.5ith technical analysis this popular, ' feel obligated to teach you once and for all

everything you need to !now about how to conduct proper technical analysis before you start

loo!ing at your first chart. lot of amateurs fail at technical analysis simply because they

didn;t have the necessary basic !nowledge to understand how to interpret technical

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P'inci(e 4: P'$+ence

-rudence refers to the ability to say F4oF when in doubt. Technical analysis is more of an art

than a science. This is because even though technical indications are scientifically generated,

the interpretation of technical indications is highly sub%ective. ?ou are going to experience

many marginal or doubtful moments in technical analysis. Technical signals that Falmost

made itF as well as technical signals that are Fneither here nor thereF. Those are the times to

exercise the technical analysis principle of -rudence and to ma!e the most conservative

interpretation. 5hen a signal is marginal, you should always exercise prudence by giving

benefit of the doubt to disqualifying the signal. 5hen a significant brea!out signal is

produced after a huge drawdown, you should exercise prudence by waiting for further

confirmation or enter the position gradually over a few days.

4 Ke! T&&": Cha'%" In+ica%&'":

Ke! T&& 1: Cha'%"

"hart reading is the most fundamental tool in technical analysis and is also why technical

analysis is frequently referred to as F"hartologyF. >efore the popularization of the internet,

during the age where analysts still read tapes, technical analysts have to obtain stoc! quotes

from Fsecret sourcesF and then plot them down on huge chart papers in their secret rooms.

5hat then is a chartN chart is simply a plot of the stoc! prices made into a curve. chart;s

basic function is to show the T&64= of a stoc!;s price action. 5ithout a chart, a stoc!

closing at a price of OA0 has no meaning at all. 5ith a chart, you can clearly see the price

action trend down from O)00 to OA0, giving investors the first indication of where the future

price action of that stoc! might be. 'n the beginning, charts are plotted merely as a single line

%oining the prices together. &ecently, with more and more powerful computers and software,more innovative and informative plotting methods li!e candlestic!s, bar charts and point and

figure charts are developed and made easily available through the internet. 4o matter what

type of chart you loo! at, the only aim is to provide an indication of where the future

movement of the stoc! might be. nother important aspect of charts is F"hart -atternsF.

=ifferent types of charting method can produce easily recognizable patterns and formations

that can be associated with certain future expectations. -opular chart patterns include

Fmorning starsF in candlestic! charting, Fdouble top brea!outF in point and figure charting

and Fdouble bottomF formation.

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Ke! T&& 4: In+ica%&'"

Technical 'ndicators are the other !ey tool in technical analysis. Technical indicators are

graphical representations of various mathematical formulas based on the stoc! price and

transaction volume. The are literally thousands of technical indicators out there and more are

being developed daily as new finance theories are translated into mathematical formulas

every day. Technical indicators; main function is to tell when a stoc! is considered oversold

or overbought and when a stoc! is considered wea! or strong relative to its past action. There

are literally endless amount of formulas that can be used to provide those indications, hence

the endless number of technical indicators. >ecause there are so many different technical

indicators out there, beginners should start with a few well !nown and widely used ones as

those tends to be used by institutional investors as well. 't can be argued that the effectiveness

of a technical indicator lies in its popularity. The more investors acting on the same indicator,

the stronger the predictive nature of the indicator becomes. self fulfilling prophecyN

Maybe.

4 Ke! C&)(&nen%": P'ice V&$)e:

Surprisingly, so many different charting methods and technical indicators used in technical

analysis all stems from the same !ey components, -rice and Kolume. The price and volume

of a stoc! are the only two publicly available information pertaining to that stoc!. (ut of its

price and volume, stoc! charts and technical indicators are created. "andlestic! and bar

charts are constructed out of the opening price, closing price as well as high and low prices.

&elative Strength 'ndex is created out of the price as well as volume of a stoc! compared

against its historical data.

Ke! C&nce(%": Re"i"%ance S$((&'% T'en+ Pa%%e'n" Se%$(":

The A !ey concepts of technical analysis are the A most important analytical methods in

technical analysis. Lnderstanding all A are critical to the mastery of technical analysis. ll A

!ey concepts wor! together to help technical analysts predict future stoc! movement and

!now when to buy or sell a stoc!. (f particular importance is the ability to tell when to buy or

sell a stoc!. This is the !ind of information that fundamental analysis will not provide.

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Ke! C&nce(% 1: Re"i"%ance Le-e

resistance level is a price level at which most investors sells a particular stoc! at, resulting

in the stoc! falling every time that price level is hit. 't acts almost li!e a bric! ceiling from

which the stoc! falls down every time it hits its head on it. &esistance levels are identified

from reading price charts, particularly point and figure charts. 't is a level which you might

want to at least ta!e some profit off the table. 6ven though resistance levels ma!e excellent

selling points, a brea!out of a resistance level does spur a stoc! strongly to upside, creating

an excellent buying opportunity. 5hen anticipating resistance level brea!outs, it is important

to apply the !ey principles of technical analysis outlined above.

Ke! C&nce(% 4: S$((&'% Le-e

support level is a price level at which most investors >L?S a particular stoc! at, resulting

in the stoc! rising every time that price level is hit. Support levels are the reverse of

resistance levels and acts almost li!e a trampoline on which the stoc! rebounds every time it

lands on it. Support levels are also identified from reading price charts and is a level where

you might consider buying a stoc! at, especially when a stoc! hits a correction. 6ven though

support levels ma!e excellent buying points, a brea!down of a support level does spur a stoc!

down a lot more. This is why the !ey principles of technical analysis are important when

timing an entry using support levels.

Ke! C&nce(% : T'en+

The main ob%ective of loo!ing at the trend of a stoc! through price charts is the anticipation

that the trend is going to continue going in the same direction generally. 't is li!e buying

fashion that conforms to the current trend. 'f no other information is available, an investor

loo!ing at a price chart would always have a better feel of where a stoc! is going than an

investor loo!ing merely at a closing price, rightN (f course, no trends go on and on forever.

This is where technical indicators come in to provide an indication of how strong or wea! a

trend is.

Ke! C&nce(% : Pa%%e'n"

"hart -atterns are shapes formed by price charts. Some popular chart patterns are F=ouble

>ottomsF and F+ead and Shoulder #ormationF. They are so named based on the shape

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formed by a price chart. These easily recognizable patterns provide an interpretation on what

investors are expecting the stoc! price to head towards. =ouble >ottoms typically indicate a

reversal and head and shoulder formations typically indicate a switch to a bear trend. There

are a ton of chart patterns out there and all needs to be interpreted in con%unction with the

right technical indicators while applying the !ey principles of technical analysis.

Ke! C&nce(% : Se%$("

Setups are specific patterns formed by using different charting methods. morning star setup

using candlestic!s charting may not show up as a buying signal in a point and figure chart.

This is why different charting methods need to be used to cross chec! buying or selling

setups produced by one charting method. setup is a lot more specific than a chart pattern. chart patterns tells you where a stoc! might be heading and a setup tells you when you can

buy or sell a stoc!. Setups need to be interpreted together with the other !ey concepts while

applying the technical analysis principles. buying setup occurring at support levels or a

selling setup occurring at resistance levels ma!es the setups more convincing.

ll the fundamentals of technical analysis needs to be used together li!e all parts of a car,

nothing can be left out if you want to be successful with technical analysis. So far, you might

notice that technical analysis has the ability to precisely time entries and exits on high

probability stoc!s. This is also what ma!es technical analysis so important to options trading.

Trading Stoc! options requires the stoc! in question to move as expected quic!ly in order to

reduce the effects of time decay and to maximize profits. ' hope this article has been useful to

you as you start your %ourney in trading and to your future success.

Iet me begin by stating that ';m a believer of both camps of technical analysis and

fundamental analysis. This article is primarily focused on the very basics of what is technicaland fundamental analysis, and some of the criticisms on them.

Technical analysis and fundamental analysis are merely two different analysis methods. 'n a

nutshell, technical analysis loo!s at price actions and indicators, and uses this data to predict

future price movements. #undamental analysis, however, loo!s at economic factors, business

fundamentals, stoc! price vs value, etc.

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Si)ia'i%ie" #e%,een Technica an+ F$n+a)en%a Ana!"i":

Technical analysis and fundamental analysis both aim to help determine a buy7in price and

sell price for a stoc!. >y doing so, both analysis helps to reduce the probability of losing and

increase the probability of winning.

ambling dens earn by the concept of probability. So does technical and fundamental

analysts. Technical analysts go for low ris! high probability setups. #undamental analysts

reduce ris!s or increase probability of success by determining an intrinsic value for the

company and enter with a margin of safety.

>oth types of analyses give an advantage to the analysts as compared to a normal layman

who buy based on hearsay, gut feel and loo!7loo!7see7see.

Di99e'ence" #e%,een Technica an+ F$n+a)en%a Ana!"i":

The main thing a fundamental analyst does is to analyse the company;s business prospects

2economic and industry factors3, financial statements, cashflow statements, and attempt to

calculate a value for the company, using 4K, -96 ratios, -9> ratios, =iscounted "ash #low

Kaluations method, etc. 'f the price is at a discount, i.e. at a margin of safety, then buy. 'f it;s

not, then do not buy, or sell. F-rice is what you pay, value is what you get.F

(n the other hand, a technical analyst believes that company fundamentals are all reflected in

the charts. ll there is to !now about the company can be found in the charts. Technical

analysis is about mass human psychology, and the more people using it, the more self7

fulfilling it becomes. There is little issues with any creative accounting a rouge company

might do. F"harts do not lie.F

The time frame of a fundamental analyst is also generally longer than that of a technical

analyst. The main reason is because for a fundamental analyst who analyzes financial

statements, such statements only come out quarterly, hence the time lag. +owever, for a

technical analyst, the time frame is generally much shorter, from a matter of hours to days or

months.

Iastly, fundamental analysts usually average down when there;s value. Technical analysts

usually average up on brea!outs.

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C'i%ici")" &9 Technica Ana!"i":

4on7believers of technical analysis 2who are usually staunch fundamental analysis believers3

see it li!e gambling. ny attempt to predict future price actions is a form of guessing and

gambling. They fail to see how drawing of trend lines here and there li!e little !ids, and

seeing technical indicators of past price actions, will give an idea of a stoc!;s worth. F=o not

predict the mar!etF, they say.

The fact that most use against technical analysis is that the world;s richest man, 5arren

>uffett, uses mainly fundamental analysis. lso, some of the people whom ' have come

across tells me that their earnings are more when they use fundamental instead of technical

analysis.

+owever, from personal experience, technical analysis does wor! when done correctly. Strict

money management and tight cut loss rules are paramount to the success of technical

analysis. 'n addition, the mindset of a technical analyst must be different from a fundamental

analyst.

C'i%ici")" &9 F$n+a)en%a Ana!"i":

The main attac! on fundamental analysis is value traps and fa!e information. "ompanies

such as 6nron, "hartered, #erro"hina, >eauty "hina, are used as examples. The critics '

!now so far on fundamental analysis had bad experience with buying and holding. lot of

Singaporeans also lost money on investing in the Singapore overnment Iin!ed "hartered

Semiconductor. 'n short, fundamental analysis has failed them.

The second criticism on fundamental analysis has its basis in the theory of efficient mar!et

hypothesis. The theory states that the mar!et;s price is always the correct one. ny past

trading information is already reflected in the price of the stoc! and, therefore, any analysis to

find undervalued securities is useless.

5ith regards to the first criticism, it;s in my belief that these people had not done proper

homewor! on fundamental analysis before ma!ing their buy decisions. lso, they were

greedy for more, even when prices are high. 6veryone hopes to be the next 5arren >uffett,

but are sorely disappointed. Gust li!e technical analysis done wrongly would lead to monetary

losses, so would fundamental analysis*

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The efficient mar!et hypothesis theory hold more weight in my opinion, which is the main

reason why ' do not totally forego technical analysis as part of my arsenal of determining a

buy7in price.

C&)#inin. Technica an+ F$n+a)en%a Ana!"i"

lthough technical analysis and fundamental analysis seems to be radically different, in

actual fact, they are lin!ed at times. More often than not, great fundamentals are usually

together with great technical setups.

s for me, ' have experienced some success in combining the two analytical techniques,

particularly for Macquarie 'nternational 'nfrastructure #und and Starhill lobal &6'T. Stoc!s

are identified using fundamental analysis to determine if a stoc! is undervalued. Technical

analysis is then used to attempt an optimal entry into the stoc! to improve the gains on

investment and obtain the best margin of safety. veraging down is done on buying every

support. 'n addition, if an extremely bearish technical setup is seen, then even though

fundamentals loo! good on reports, we have to beware of a possible bad news announcement

coming soon. 't would then be good to wait for entry.

(n the other hand, a technical analyst could loo! into fundamentals to add strength and

conviction to a technical buy9sell signal.

Mixing these two schools of thoughts isn;t an easy process, and is sometimes frowned upon

by the most devoted technical analysts or fundamental analysts. The strategies and mindsets

of each is different, and not being clear in differentiating your strategies and mindsets could

lead to poor buy7ins. +owever, for the recreational investor9trader li!e me, combining and

understanding these two schools of thoughts certainly offer benefits.... t least you have an

analytical reason for buying instead of blindly listening to other FanalystsF.

The L&.ic #ehin+ Technica Ana!"i":

Iet me first say that ' do not now engage in technical analysisC nor, have ' ever engaged in

technical analysis. ' do not believe doing so would be a productive use of my time having

said that, ' do not claim technical analysis has no predictive value. 'n fact, ' suspect it does

have some predictive value. The 6fficient Mar!et +ypothesis is flawed. 't is based upon the

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2unwritten3 premise that data determines mar!et prices. s raham so clearly put it in

FSecurity nalysisF1

F...the influence of what we call analytical factors over the mar!et price is both partial and

indirect 7 partial, because it frequently competes with purely speculative factors which

influence the price in the opposite directionC and indirect, because it acts through the

intermediary of people;s sentiments and decisions. 'n other words, the mar!et is not a

weighing machine, on which the value of each issue is recorded by an exact and impersonal

mechanism, in accordance with its specific qualities. &ather should we say that the mar!et is

a voting machine, whereon countless individuals register choices which are the product partly

of reason and partly of emotion.F

';ve seen a lot of people cite this quote, without bothering to notice what;s really being said.

raham had a very broad mind, much broader than say someone li!e >uffett. That;s both a

blessing and a curse. t several points in Security nalysis 2and to a lesser extent in his other

wor!s3, raham can not help but explore an interesting topic more deeply than is strictly

necessary for his primary purpose. 'n this case, raham could have said what many have

since interpreted him as saying1 in the short run, stoc! prices often get out of whac!C in the

long run, they are governed by the intrinsic value of the underlying business. (f course,

raham didn;t say that. 'nstead he chose to describe the stoc! mar!et in a way that should

have been of great interest to economists as well as investors.

=ata affects prices indirectly. The mar!et is a lot li!e a fun house mirror. The resulting

reflection is caused in part by the original data, but that does not mean the reflection is an

accurate representation of the original data. To ta!e this metaphor a step further, the 6fficient

Mar!et +ypothesis is based on the idea that the original image acts on the mirror to create the

reflection. 't does not recognize the unpleasant truth that one can interpret the same process in

a very different way. (ne could say it is the mirror that acts on the original image to create

the reflection. 'n fact, that is often how we interpret the process. 5e say an ob%ect is reflected

in a mirror. 5e rarely use the active Fan ob%ect reflects in a mirrorF.

#or some reason, when we tal! about the mar!et we li!e to use inappropriate metaphors. 5e

tal! about wealth being destroyed when prices fall. ?et, no one tal!s of wealth being

destroyed when the price of some product falls. 5hen the mar!et rises, we tal! about buyers,

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as if there wasn;t a seller on the other side of the trade. bove all else, we tal! about Fthe

mar!etF not as a mere aggregation of trades, but as some sort of ob%ect all its own.

The 6fficient Mar!et +ypothesis does not recognize the true importance of interpretation.

Saying that data 2publicly available information3 acts on mar!et prices omits the !ey step.

fter all, the same data is available to every blac!%ac! player. "asinos %ust don;t li!e the way

a card counter interprets that data.

The 6fficient Mar!et +ypothesis is not the only argument against technical analysis. There is

also empirical evidence that questions the utility of technical analysis. +owever, empirical

evidence alone is not sufficient to prove technical analysis has no predictive power. 'f most

!nuc!leball pitchers had limited success, the !nuc!leball might be an inherently ineffective pitch, or there might be a better way to throw it. The same is true of technical analysis.

The ad%ective FrandomF is a very strange word. lthough it is rarely the definition given, the

most appropriate definition for random would have to be Fhaving no discernible patternF. The

word discernible can not be omitted. 'f it is, we will ta!e too high a view of science and

statistics. There;s a great introduction to economics written by "arl Menger which begins1

Fll things are sub%ect to the law of cause and effect. This great principle !nows no

exception, and we would search in vain in the realm of experience for an example to the

contrary. +uman progress has no tendency to cast it in doubt, but rather the effect of

confirming it and of always further widening !nowledge of the scope of its validity.F

ll things are sub%ect to the law of cause and effectC therefore, nothing is truly random.

caused event must have a pattern 7 though that pattern needn;t be discernible. 6ven if one

argued there is such a thing as an uncaused event, who would argue that stoc! price

movements are uncausedN 5e !now that they are caused by buying and selling. Stoc! prices

are the effects of purposeful human actions. Several sciences study the causes of purposeful

human actionC so, it would be hard to argue any human action is uncaused. #urthermore, each

of our own internal mental experiences suggests that our purposeful actions have very

definite causes. 5e also !now that the actions of some mar!et participants are based in part

on price movements. Many investors will admit as much. They may be lying. >ut, there is

plenty of evidence to suggest they aren;t.

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'f the actions of investors cause price movements, and past price movements are a partial

cause of the actions of investors, then past price movements must partially cause future price

movements.

Technical analysis is logically valid. 4ot only is it possible that some form of technical

analysis might have predictive powerC ' would argue it necessarily follows from the above

assumptions that some form of technical analysis must have predictive power.

So, why don;t ' use technical analysisN ' believe fundamental analysis is a far more powerful

too. 'n fact, ' believe fundamental analysis is so much more powerful that one ought not to

spend any time on technical analysis that could instead be spent on fundamental analysis. '

also believe there is more than enough fundamental analysis to !eep an investor occupiedC so,he shouldn;t devote any time to technical analysis. -ersonally, ' feel ' am much better suited

to fundamental analysis than ' am to technical analysis. (f course, there is no reason why this

argument should hold any weight with you. ' also believe there is sufficient empirical

evidence to support the idea that fundamental analysis is a far more powerful tool than

technical analysis.

6ven though ' believe there must be some form of technical analysis that does have

predictive power, the mental model of investing which ' have constructed does not allow for

such a form of technical analysis. 'n other words1 logically, there must be an effective form of

technical analysis, but practically, ' pretend there isn;t.

5hyN >ecause ' believe that;s the most useful model. (ne should adopt the most useful

model not the most honest model. ';m willing to pretend technical analysis does not wor!,

even though ' !now some form of it must wor!.

&eally, this isn;t all that strange. 'n science, ';m willing to pretend there are random events,

even though ' !now there must not be random events. 'n math, ';m willing to pretend zero is a

number, even though ' !now it must not be a number. model with random events is useful.

'n most circumstances, a refusal to allow for random events would be harmful rather than

helpful. The model with random events is simpler and more wor!able. The situation is much

the same with zero. 't isn;t a number. To include zero as a number, you would have to put

aside the principles of arithmetic. So, we don;t do that. 'n school, you were taught that zero is

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a number, but that there are certain things you must never do with zero. ?ou accepted that,

because it was a simple, wor!able model.

' propose you do much the same in the case of technical analysis. ?ou should recognize the

logical validity of technical analysis, but create a mental model of investing in which

technical analysis has no utility whatsoever.

#or decades, analysts of one camp argued about the ineffectiveness of the other and provided

reasons and evidences how one method of analysis can be used at the exclusion of the other.

#or decades, fundamental analystsC people who dig deep into the business model and

financial statements of companies, gave proof to the ineffectiveness of technical analysis. #or

decades too have technical analystsC people who read charts to find trends, patterns andinvestor behaviors, gave proof to the ineffectiveness of fundamental analysis.

Suddenly, it feels li!e there are different worlds existing simultaneously, tal!ing about the

same stoc!s, same mar!ets with views that are supposed to have nothing to do with one

another. +ow is that possibleN

'f fundamental analysis is truly ineffective, why have fundamental analysis existed for so

many centuriesN 'f technical analysis is truly ineffective, why are technical analysis and

chartists still paid so much money in 5all StreetN 'f fundamental analysis is ineffective, why

does earnings releases move stoc!s so muchN 'f technical analysis is ineffective, why do

resistance levels and support levels prove to be accurate time and time over againN 5hat if

both methods are truly one and the same thingN

?es, fundamental analysis and technical analysis are really two sides of the same coin, two

perspectives on the same issue and two components ma!ing up a full picture.

#undamental analysis explores main issuesC 6arnings expectation and rowth expectations.

The ultimate ob%ective of fundamental analysis is to arrive at an opinion on the future

profitability of a company and how much that profitability is worth in terms of stoc! price.

The higher the earnings expectations and growth expectations, the higher the stoc! price

ought to be. +owever, scientific as this may be, it is missing the final element that moves

stoc!s... investor sentiments or how much investors thin! that earnings and growth

expectation is ultimately worth* Technical analysis reflects the final verdict of investors

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towards that earnings and growth expectation. 5ithout this final verdict, all analysis is

meaningless. +owever, this final verdict may not always be inline with your own expectation

towards the future profitability and growth of a company. >ecause both fundamental analysis

and technical analysis is really the same thing, a decision to buy or sell a stoc! should ta!e

both views into consideration. 5hen fundamental analysis revealed a potential rise in

earnings, does the charts support that viewN +ave investors started moving ahead of the

newsN =oes the trend so far reveal that investors are not impressed with that outloo! at allN

5hen a reversal signal turns up in technical analysis, is there any fundamental reasons

driving that reversalN 's it %ust nothing but an unsustainable exuberance not supported by

fundamental reasonsN

That being said, when a company;s fundamental outloo! is continuously strong over a long

period of time, technicals will also reflect that same long term strength through long term

bullish trend and patterns.

'n this sense, fundamental analysis and fundamental analysis are truly one and the same and

nobody can do with one and not the other. 't is li!e examining the physical attributes of a

boxer versus his trac! record. ?ou cannot have a complete picture of the capabilities of a

boxer unless you ta!e both views into consideration.

>ecause fundamental analysis and technical analysis are different views on the same

sub%ect, they both have certain strengths over each other.

#undamental analysis is capable of telling if a company has long term growth potential and

whether or not its stoc!s are worth while long term investments. +owever, fundamental

analysis is incapable of predicting or explaining short term trends of a few days that are not

caused by fundamental company events li!e earnings release. Technical analysis on the other hand is capable of telling when prices are out of sorts and when prices shouldn;t rise or fall

anymore using support and resistance levels. Such !nowledge is extremely useful in trading

short term trends. +owever, technical analysis has proved to be ineffective at predicting long

term price actions as business fundamentals does change significantly from year to year.

' hope ' have resolved the feud between fundamental and technical analysis today and that

you have understood that both are really the same thing, tal!ing about the same thing while

providing a slightly different perspective. ' hope you will embrace both methods from now

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HISTORY OF STOCK ECHANGE:

The only stoc! exchanges operating in the )Jth century were those of >ombay set

up in )B8A and hmadabad set up in )BJ@. These were organized as voluntary non profit7

ma!ing association of bro!ers to regulate and protect their interests. >efore the control on

securities trading became central sub%ect under the constitution in )JA0, it was a state sub%ect

and the >ombay securities contracts 2control3 ct of )JA used to regulate trading in

securities. Lnder this act, the >ombay stoc! exchange was recognized in )J8 and

hmedbad in )J/8.

=uring the war boom, a number of stoc! exchanges were organized in >ombay, hmedbad

and other centers, but they were not recognized. Soon after it became a central sub%ect,

central legislation was proposed and a committee headed by .=. orwala went into the bill

for securities regulation. (n the basis of the committee$s recommendations and public

discussion, the securities contracts 2regulation3 ct became law in )JA.

DStoc! exchange means anybody or individuals whether incorporated or not, constituted for

the purpose of assisting, regulating or controlling the business of buying, selling or dealing in

securitiesE.

't is an association of member bro!ers for the purpose of self7regulation and protecting the

interests of its members.

't can operate only if it is recognized by the overnment under the securities contracts

2regulation3 ct, )JA. The recognition is granted under section / of the ct by the central

government, Ministry of #inance.

BOMBAY STOCK ECHANGE:

This stoc! exchange, Mumbai, popularly !nown as D>S6E was established in )B8A

as DThe 4ative share and stoc! bro!ers associationE, as a voluntary non7profit ma!ing

association. 't has an evolved over the years into its present status as the premiere stoc!

exchange in the country. 't may be noted that the stoc! exchanges the oldest one in sia, even

older than the To!yo stoc! exchange, which was founded in )B8B.

The exchange, while providing an efficient and transparent mar!et for trading in

securities, upholds the interests of the investors and ensures redressed of their grievances,whether against the companies or its own member bro!ers. 't also strives to educate and

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enlighten the investors by ma!ing available necessary informative inputs and conducting

investor education programs.

governing board comprising of J elected directors, S6>' nominees, 8 public

representatives and an executive director is the apex body, which decides is the apex body,

which decides the policies and regulates the affairs of the exchange.

The 6xchange director as the chief executive offices is responsible for the daily today

administration of the exchange.

NATIONAL STOCK ECHANGE:

The 4S6 was incorporated in 4ov, )JJ with an equity capital of &s.A crs. The

international securities consultancy 2'S"3 of +ong angalore Stoc! 6xchange

• >hubaneswar Stoc! 6xchange

• "alcutta Stoc! 6xchange

• "ochin Stoc! 6xchange

• "oimbatore Stoc! 6xchange

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• =elhi Stoc! 6xchange

• uwahati Stoc! 6xchange

• +yderabad Stoc! 6xchange

• 'ndore Stoc! 6xchange

• Gaipur Stoc! 6xchange

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The securities contract regulation act )JA has provided uniform regulation for the admission

of members in the stoc! exchanges. The qualifications for becoming a member of a

recognized stoc! exchange are given below1

The minimum age prescribed for the members is ) years.

+e should be an 'ndian citizen.

+e should be neither a ban!rupt nor compound with the creditors.

+e should not be convicted for fraud or dishonesty.

+e should not be engaged in any other business connected with a company.

+e should not be a defaulter of any other stoc! exchange.

The minimum required educational is a pass in )th standard examination.

Meanin. &9 +e)a%:

Equity Analysis Banking Sectors Using of Technical Analysis.-shiram Insight

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Transcript of Equity Analysis Banking Sectors Using of Technical Analysis.-shiram Insight