Chapter 4 Technical Analysis PDF

SECURITY ANALYSIS CHAPTER TECHNICAL ANALYSIS  SECURITY ANALYSIS Learning Objective: To introduce the concept of technical analysis and to detail the various tools/techniques deployed as a part of the same  SECURITY ANALYSIS Technical Analys...

SECURITY ANALYSIS CHAPTER TECHNICAL ANALYSIS  SECURITY ANALYSIS Learning Objective: To introduce the concept of technical analysis and to detail the various tools/techniques deployed as a part of the same  SECURITY ANALYSIS Technical Analysis: Fundamental and technical analyses are the two approaches deployed in security analysis. Technical analysis adopts a radically different approach towards security analysis when compared to fundamental analysis.  SECURITY ANALYSIS Technical Analysis: Comparison of Fundamental and Technical Approach 1. Technical analysis adopts a radically different approach towards security analysis when compared to fundamental analysis. 2. fundamental analysis assumes that the market prices are a representation of the fundamental characteristics of the underlying company/security and are not influenced by investor behaviour, technical analysis assumes that market prices are simply a play between the market forces of demand and supply (driven by investor behaviour) and are not dependent on the underlying fundamental characteristics of the security.  SECURITY ANALYSIS Technical Analysis: Comparison of Fundamental and Technical Approach 3. fundamental analysis” have been considered which attempt to measure a security's intrinsic value. Technical analysis, on the other hand, is aimed at identifying patterns in share price/return series that can suggest/forecast future activity/levels.  SECURITY ANALYSIS Technical Analysis: Intrinsic value is what a security or company is actually worth, really worth, rather than its book value or market price. Intrinsic value takes into account a number of variables including trademarks, copyrights, the quality of the directors, the business climate, and brand name – features that are not easy to calculate and are not generally reflected accurately in the market price.  SECURITY ANALYSIS Technical Analysis: Intrinsic value , often called fundamental value, also refers to the value of an option, product, property or currency – it is determined through fundamental analysis with no reference to its market value. Determines through fundamental analysis.  SECURITY ANALYSIS Technical Analysis: can be defined as a method of evaluating the timing of securities (in terms of buy/sell/hold decisions) by analysing the data generated by market activity, such as past prices and volume.  SECURITY ANALYSIS Technical Analysis: Volume, which is simply the number of shares traded over a given period, is an important factor in technical analysis. Volume is primarily used to measure the strength of any given price movement. For instance, a 50 per cent rise in a stock’s price may not be relevant if it occurs over a very low volume, for example, penny stocks (extremely volatile stocks of very small companies)..  SECURITY ANALYSIS Technical Analysis: Technical analysis employs various charts, tools and statistical techniques to ascertain patterns and trends in the share prices/returns data by observing the movement of share prices/returns in the past.  SECURITY ANALYSIS Technical Analysis: Under this analysis, investors classify trends on the basis of their duration (long term, short term) and their nature (uptrend, downtrend). After identifying their investment horizons, investors enter (buy) and exit (sell) the market, according to the trend which suits them (according to their risk–return profile).  SECURITY ANALYSIS Economic Basis of Technical Analysis: Technical analysis is that form of security analysis which relies on price and volume Data.  SECURITY ANALYSIS Economic Basis of Technical Analysis: -Supply and demand determine prices. -Supply and demand aspects are affected by many factors, both rational and irrational. These may be fundamental factors as well as psychological (behavioural) factors.  SECURITY ANALYSIS Economic Basis of Technical Analysis: - Except for minor deviations, stock prices move in fairly discernible trends. - Changes/shifts in supply and demand bring about changes in trends.  SECURITY ANALYSIS Economic Basis of Technical Analysis: - the goal of technical analysis is to take advantage of short-term price movements (from the stock’s intrinsic value) by buying or selling (without considering the fundamentals) for gaining profit in the short term.  SECURITY ANALYSIS Economic Basis of Technical Analysis: - Technical analysis can also be thought of as a study of collective investor psychology; the prices of a security are set by humans and humans are irrational, so the prices never reflect the security’s intrinsic value, and hence, technical analysts always have room for profit.  SECURITY ANALYSIS Assumptions of Technical Analysis: i) The market discounts everything—Technical analysis assumes that market prices reflect all available information.  SECURITY ANALYSIS Assumptions of Technical Analysis: (ii) Prices always move in trends—Technical analysis assumes that prices always follow a trend, and there is no “randomness” in the movement of prices as suggested by the “random walk” hypothesis.  SECURITY ANALYSIS Assumptions of Technical Analysis (iii) History tends to repeat itself—Technical analysis assumes that past trends are the predictors of future movements and that a stock will continue to exhibit the same pattern/trend in the future, which it exhibited in the past..  SECURITY ANALYSIS Difference Between Fundamental and Technical Analysis Technical and fundamental analyses are both valid security analysis tools, but they approach the market in different ways: (i) Fundamental analysis is a much wider field and includes the complete economic, industry and company analyses. Technical analysis, on the other hand, is based typically on price and volume data.  SECURITY ANALYSIS Difference Between Fundamental and Technical Analysis Technical and fundamental analyses are both valid security analysis tools, but they approach the market in different ways: (ii) Technical analysis is based on more concrete data in terms of price and volume, in order to predict the movement of the security. On the other hand, fundamental analysis is based on not just concrete data but also on assumptions and future estimates.  SECURITY ANALYSIS Difference Between Fundamental and Technical Analysis Technical and fundamental analyses are both valid security analysis tools, but they approach the market in different ways: (iii) Technical analysis is a short-term approach, whereas fundamental analysis is more of a theoretical approach for long-term investment.  SECURITY ANALYSIS Difference Between Fundamental and Technical Analysis Technical and fundamental analyses are both valid security analysis tools, but they approach the market in different ways: (iv) Technical analysis appeals to short-term traders, whereas fundamental analysis is the tool used by long-term investors..  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis PRICE BUYING ACTIVITY = BULLISH Positive rally Confidence in the market- investor  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis PRICE BUYING SELLING = BEARISH Negative rally Sign of Pessimism in the market- investor Market Forces impact price levels positively/ Negatively, respectively  SECURITY ANALYSIS Market Trends/Phases Under Technical Anal Bull Trend Technically, a trend is regarded as bullish when the high point of each rally (increase in price movement) is higher than the high point of the previous rally, and the low point of each decline (downward price movement) is higher than the low point of the previous decline.  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis Bull Trend First sub- phase - stock prices may also start to grow as a response to some improvements in the business conditions of the industry/company under consideration.  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis The second sub-phase begins when the earnings of the industry/company under consideration rise significantly. This attracts even more investors; this is still a fact-driven investment scenario..  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis Bull Trend The last phase is where speculation starts to dominate and the investors’ irrational exuberance starts to govern the stock prices (rather than the actual financial gains of the company/industry), pulling them way above their intrinsic value. A prolonged speculative sub-phase may result in the formation of a stock market bubble.  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis Bear trend Technically, a trend is regarded as bearish when the high point of each rally (increase in price movement) is lower than the high point of the previous rally, and the low point of each decline (downward price movement) is lower than the low point of the previous decline.  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis Bear trend The first sub-phase is where there is a significant loss in the profitability/growth of the investment/capital for the company/industry under consideration..  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis Bear trend The second sub-phase, where there is sustained decline in stock prices (which is an implication of the factual conditions that the company’s/industry’s earnings are reducing).  SECURITY ANALYSIS Market Trends/Phases Under Technical Analysis Bear trend the third sub-phase, where there is abnormal fall in stock prices as a response to the pessimism/distress of investors. In this sub-phase the value of stock generally falls way below its intrinsic value; a prolonged speculative sub-phase may result in a market crash.  SECURITY ANALYSIS Thank you and God Bless!!!  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 1. Tools for Assessing Overall Market Movement 2. Tools for Assessing Individual Stock’s Movements  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 1. Tools for Assessing Overall Market Movement a. Dow Theory b. Elliot Wave Principle c. Kondratiev Wave Theory d. Chaos Theory e. Neutral Network and Genetic Algorithms f. Breadth of Market Analysis  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement a. Dow Theory is based on Charles H. Dow’s article published in 1900 in the Wall Street Journal (IFC Markets.com, 2018).  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 1.Market trend/movement a. The Primary/ main trend b. Intermediate/ Medium / Secondary trends c. Short swings or daily fluctuations  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 2. Market Phases a. Accumulation phase b. Absorption/ Public Participation Phase c. Distribution Phase.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 3. Stock markets are efficient and discount all news New law, War, Financial Scandals Researches  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 4. Stock market sector averages must confirm each other  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 4. Stock market sector averages must confirm each other  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 5. Trends are confirmed by volumes—  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 6 Basic characteristics of Dow theory 6. Trends exist until definitive market signals/indicators prove that they have ended  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 1. Tools for Assessing Overall Market Movement B. Elliot Wave Principle- Proposed by Ralph Nelson Elliott in 1938, the Elliott wave principle posits that investor psychology and the resultant optimism/pessimism moves in waves (Stockcharts.com, 2018).  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: B. Elliot Wave Principle-It works on the principle that each major trend can be broken down into five smaller waves.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: B. Elliot Wave Principle-I n an upward trend, three out of five waves would be higher than the other two waves and the reverse will take place in case of a downturn; three of the five waves would be lower than the others.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement C. Kondratiev Wave Theory- Propounded by Soviet economist Nikolai Kondratiev (also written as Kondratieff or Kondratyev) in 1925  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Kondratiev wave theory posits super market cycles that range over 50–60 years (Kondratieff.net, 2018). They represent cycles of high sectoral growth (upturn) or low sectoral growth (downturn) in the economy.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement C. Kondratiev identified three sub-phases in the overall market cycle: a. Expansion, b. Stagnation c. Recession  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement C. Kondratiev identified three sub-phases in the overall market cycle: Due to the large period of time considered, most financial analysts tend to ignore this theory, as it is difficult to determine the causes of such waves (as multiple events could have taken place over the long period).  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement D. Chaos theory is an emerging field of study in Physics, which postulates that apparently random behaviour, in instances, is quite systematic or even deterministic.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement E. Neural Networks and Genetic Algorithms Neural networks, a branch of computer science and artificial intelligence, basically refers to a system in which an anticipating model is trained to ascertain a desired output from the past data.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement E. Neural Networks and Genetic Algorithms Each network is allowed to swim against the altering flow of data, learn from it, and assume the role of mother by defeating all the other newts in terms of accuracy and endurance (survival of the fittest).This allows the network to learn and arrive at the best prediction model and follow it..  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 1. Tools for Assessing Overall Market Movement F. Breadth of Market Analysis 1. Advance/ Decline Ratio 2. Short Interest Ratio Theory 3. Confidence Index 4. Relative Strength Analysis (RSA)  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 1. Tools for Assessing Overall Market Movement F. Breadth of Market Analysis Market breadth indicators analyze the number of stocks advancing relative to those that are declining in a given index or on a stock exchange, such as the New York Stock Exchange (NYSE) or Nasdaq.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement F. Breadth of Market Analysis 1. Advance/ Decline Ratio Advance” denotes the number of shares whose share prices have increased (advanced) on a particular day, and “decline” denotes number of shares whose share prices have decreased (declined) on a particular day.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement F. Breadth of Market Analysis 1. Advance/ Decline Ratio Suppose on March 1, 2020, the number of stocks on the Bombay stock exchange (BSE) that advanced (closed at a price higher than the opening price) was 1,500, and the number of stocks that declined (closed at a price lower than the opening price) was 1,000. Calculate the advance–decline ratio for the BSE  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Advance/ Decline Ratio Step 1. Calculate the number of net advances/declines on a daily basis. This can be calculated by subtracting the number of shares which have declined from the number of shares which have advanced on a particular day.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Advance/ Decline Ratio Step 2. Estimate the market breadth by cumulating the daily net advances/declines, for a particular period. *Ordinarily, the market breadth is expected to move in tandem with the market averages (measured through indices).  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Advance/ Decline Ratio if the market average is moving upwards, whereas the market breadth is moving downwards (more declines than advances), it indicates that the market may be turning bearish If the market average is moving downwards but the market breadth is moving upwards, it indicates that the stock market may be turning bullish.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Short Interest Ratio Theory The short interest theory suggests that shares sold first at higher prices and bought later at lower prices (short selling) may be prime candidates for significant price rise in the near future. Overall, this is a bearish indicator as speculators expect to fall in the future.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Confidence Index The investor confidence index, for any economy, is an indicator designed to measure investor confidence that can be taken to be the degree of optimism regarding the state of economy (that consumers are expressing through activities of savings and spending).  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Odd Lot Ratio The most successful investors are the ones who are rational and who do not let emotion sway their decision-making. However, smaller irrational investors have acquired a reputation for doing just the opposite.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Relative Strength Analysis (RSA) RSA is based on the assumption that the prices of securities rise quickly during the bull phase but fall at a much slower pace during the bear phase, when compared with the market as a whole. SECURITY ANALYSIS  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 1. Tools for Assessing Overall Market Movement Relative Strength Analysis (RSA) If the ratio is greater than one, the security has relative strength.  SECURITY ANALYSIS Thank you and God Bless!!!  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis a.1 Bar and line Charts a.2 Head and Shoulders (HS) Pattern a.3 Inverse Head and Shoulder (HIS) Pattern a.4 Pennant and Flag a.5 Resistance and Support Level a.6 Triangle Formation a.7 Point and Figure Charts (PFC)  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis a.2 Head and Shoulders (HS) Pattern  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis Line Chart Represents only the closing prices over a set period of time Line is formed by connecting the closing prices over the time frame  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis Bar chart or bar graph A bar chart or bar graph is a chart with rectangular bars with lengths proportional to the values that they represent Price vs Time High Low Open Close  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis Candle Sticks Chart Candle stick chart is similar to a bar chart Difference comes in the formation of a wide bar on the vertical line, which illustrates the difference between the open and close Rely heavily on the use of colors  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis Candle Sticks Chart Close > Open => Green or white or Blank Close < Open => Red or black or filled  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Support and Resistance Levels Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Support and Resistance Levels Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Support and Resistance Levels  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Patters  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements Head and Shoulder The head-and-shoulders top signals to chart users that a security's price is likely to make a downward move, especially after it breaks below the neckline of the pattern. Due to this pattern forming mostly at the peaks of upward trends, it is considered to be a trend-reversal pattern, as the security heads down after the pattern's completion.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements Head and Shoulder  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Head and Shoulder  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Inverted Head and Shoulder The inverted head-and-shoulders pattern is the exact opposite of the head-and-shoulders top, as it signals that the security is set to make an upward move. Often coming at the end of a downtrend, the inverse head and shoulders is considered to be a reversal pattern, as the security typically heads higher after the completion of the pattern.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Inverted Head and Shoulder  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Double Tops and Bottoms These two reversal patterns illustrate a security's attempt to continue an existing trend. Upon several attempts to move higher, the trend is reversed and a new trend begins. These chart patterns formed will often resemble what looks like a "W" (for a double bottom) or an "M" (double top).  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Double Tops The double-top pattern is found at the peaks of an upward trend and is a clear signal that the preceding upward trend is weakening and that buyers are losing interest. Upon completion of this pattern, the trend is considered to be reversed and the security is expected to move lower.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Double Tops  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Double Bottom A double bottom appears when a share hits a low, comes higher, again pulls back. A double bottom appears at the end of a bearish trend and indicates the start of the bullish trend.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Double Bottom  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Strategies  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Gaps Gaps occur when a price opens much higher (gap higher) or lower (gap lower) than the previous day’s close. Once a gap occurs, the new price represents an important price level. Gaps higher create support that should allow the stock to move higher and gaps lower create resistance that should pressure the stock lower. Until the gap is violated, we should assume the trend will continue in the gap’s direction.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Gaps  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Breakaway Gaps They occur when the price action is breaking out of their trading range or congestion area. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. To break out of these areas requires market enthusiasm and, either, many more buyers than sellers for upside breakouts or more sellers than buyers for downside breakouts.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Breakaway Gaps  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Runaway Gaps Runaway gaps are also called measuring gaps, and are best described as gaps that are caused by increased interest in the stock.  For runaway gaps to the upside, it usually represents traders who did not get in during the initial move of the up trend and while waiting for a retracement in price, decided it was not going to happen. Increased buying interest happens all of a sudden, and the price gaps above the previous day's close. This type of runaway gap represents an almost panic state in traders.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Runaway Gaps  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Exhaustion Gaps Exhaustion gaps are those that happen near the end of a good up- or downtrend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day's close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis 2. Tools for Assessing Individual Stock’s Movements Exhaustion Gaps  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis a.1 Bar and line Charts a.2 Head and Shoulders (HS) Pattern a.3 Inverse Head and Shoulder (HIS) Pattern a.4 Pennant and Flag a.5 Resistance and Support Level a.6 Triangle Formation a.7 Point and Figure Charts (PFC)  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements Pattern a.4 Pennant and Flag A pennant is a continuation pattern that forms when there is a brief consolidation period following a significant price movement. The pattern resembles a small symmetrical triangle, formed by two converging trend lines. These lines meet at a point called the apex. Pennants typically form after a strong price move, known as the flagpole, and are characterized by decreasing volume as the pattern develops.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements Pattern A Pennant and Flag A flag pattern is another continuation pattern, but unlike the pennant, it forms a parallelogram shape on the chart. Flags develop after a sharp price movement, creating a flagpole, followed by a consolidation period where the price moves sideways or slightly against the prevailing trend. This consolidation forms the flag portion, which is often accompanied by decreasing volume.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements A. Chart Analysis a.4 Pennant and Flag  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Two broad categories: 2. Tools for Assessing Individual Stock’s Movements B. Moving Average Analysis C. Bollinger Band D. Fibonacci Series E. Spreads F. Insider Transactions  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements Moving Average Analysis A moving average is calculated by taking into account the most recent n observations. For instance, a 10-day moving average will present the average of the past 10-day security prices. These averages are used to predict trends. For example, a 300-day moving average of daily prices may be used to identify a long-term trend, a 75-day moving average of daily prices may be used to discern a medium-term trend and a 15-day moving average may be used to detect a short-term trend.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements C. Bollinger Band A Bollinger band is an indicator under technical analysis which was developed by John Bollinger in 1980. It is used to determine the market movement around average asset prices. It helps in finding the direction of the prices and in monitoring the price volatilities. It employs a combination of simple moving average and standard deviation and presents them through bands.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements D. Fibonacci Series The series was provided by a medieval mathematician named Leonard Fibonacci (1170–1240). The Fibonacci series is as follows: 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233........ The first two numbers in the series are 1 and 2, and the third number is the sum of the first two numbers, the fourth number is the sum of the second and third number, and so on. Basically, the sum of the two adjacent numbers provides the next following number.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements E. Spread A spread is the difference between the bid (buying) and ask (selling) price of a security or asset. The spread for a security is influenced by the supply number of shares outstanding that are available to trade), demand in the security and the volume of trade. The bid-ask spread is one of the measures to estimate the liquidity of the stock in the market. Greater the liquidity, lower the spread and vice versa. Spreads are more relevant in the context of derivatives like futures and options  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements F. Insider Insider trading/transaction is the buying or selling of a security by an insider (someone who has access to material and non-public information). Insider trading can be illegal or legal depending on the country and also when the insider makes the trade. It is typically considered illegal, when the material information is still non-public. On the other hand, legal insider trading happens when the directors/ top executives of the company purchase or sell shares, but they disclose their transactions in the prescribed legal manner.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements F. Insider Legal insider trading can provide useful information about the way the insiders are treating the future prospects of the company and can infuse confidence (if the insiders are buying) in the small investors.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Tools for Assessing Individual Stock’s Movements F. Insider Legal insider trading can provide useful information about the way the insiders are treating the future prospects of the company and can infuse confidence (if the insiders are buying) in the small investors.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Critiques of Technical Analysis: (i) Most technical analysts are unable to provide convincing rationale behind the tools employed by them. (ii) By the time technical analysts signal an uptrend/downtrend, it may have already taken place.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Critiques of Technical Analysis: (iii) There exists some degree of confusion in the identification and/or configuration of trend lines/chart patterns, each of which can be interpreted differently by different analysts. (iv) Under the influence of herd mentality, trends may persist for quite some time.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Conclusion However, today, in spite of its inherent limitations, technical analysis is very popular. The basic reason is that markets are inefficient and price movements do offer opportunities to make abnormal returns in the short run, without getting into the detailed and exhaustive fundamental analysis.  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Conclusion Ultimately, as more and more investors deploy technical analysis, it would become a self-defeating proposition. The markets would become increasingly efficient as prices would reach an equilibrium (as technical analysts continue to gain from any deviations thereby reducing the said deviations)  SECURITY ANALYSIS Tools Deployed in/for Technical Analysis Conclusion Once the markets become efficient, technical analysis would be a worthless exercise.  SECURITY ANALYSIS Thank you and God Bless!!!