01 Technical Analysis - Level 1 - Kunal Joshi

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STOCK MARKET - BA

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• Definition: Stocks are A type of securityownership in a corporation and represents a

of the corporation's assets and earnings.• Capital Gain: Profit that results when the price

security held by a mutual fund rises above its price and the security is sold (realized gain). Ifcontinues to be held, the gain is unrealized. A would occur when the opposite takes place.

• Growth Stock: A stock that experiences a conof growth exceeding that of the economy. Genduration is over a year in length.

• Income Stock: A stock that has a high, consisdividend paid annually.

• Speculative Stock: Stocks that offer the potentsubstantial price appreciation, usually becausespecial situation such as new management orintroduction of a promising new product.


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Reading Stock Quo

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Columns 1 & 2: 52-Week High and Low - These are the highest and lowestock has traded over the previous 52 weeks (one year). This typically d

previous day's trading.

Column 3: Company Name & Type of Stock - This column lists the name of

are no special symbols or letters following the name, it is common stock(EQ

imply different classes of shares.

Column 4: Ticker Symbol - This is the unique alphabetic name which ident

watch financial TV(like CNBC ), you have seen the ticker tape move acrossthe latest prices alongside this symbol. If you are looking for stock quote

search for a company by the ticker symbol. If you don't know what a particula

you can search for it at: http://finance.yahoo.com/.


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Column 5: Dividend Per Share - This indicates the annual dividend pay

space is blank, the company does not currently pay out dividends.

Column 6: Dividend Yield - The percentage return on the dividend. Calc

dividends per share divided by price per share.

Column 7: Price/Earnings Ratio - This is calculated by dividing the curre

earnings per share from the last four quarters. For more detail on how to

our P/E Ratio tutorial.

Column 8: Trading Volume - This figure shows the total number of share

listed in hundreds. To get the actual number traded, add "00" to the end

Column 9 & 11: Day High , Low and Close - This indicates the price ran

has traded at throughout the day. In other words, these are the maximu

prices that people have paid for the stock.

Column 12: Net Change - This is the dollar value change in the stock p

day's closing price. When you hear about a stock being "up for the day,change was positive.


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Fundamental Analy

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Types of analysis

Technical Analysis

Charting

Patterns in Price Behaviour or volume

Predict future price movement

Fundamental analysis

Determining value without price

Analyzing and Interpreting the fund

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KUNAL JOSHI

Research analysi

Economic Wide factors = 30

Industry factors = 15 - 20%

Company Factors = 30

Others = 15

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Fundamental analy

Understanding the Economic Enviro

Analyzing the Industry

Assessing the projected performanc

Company

(One must hone the skill needed for t

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Economic Environm

Global economic scenario Central Government PolicyKey Variables

Growth rate of GDP

Industrial Growth rate,

Agriculture and Monsoon,

Savings and investments,

Price level and inflation,

Interest rates

Infrastructure facilities

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Industry analysis

Analyze the prospects of each indus Difficult to forecast the future

Consists of 4 parts

Sensitivity to the business cycle

Industry life cycle analysis

Structure and characteristics

Profit Potential of the industry

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Industry analysis

Sensitivity to the business cycleEg: Auto industry vs Pharmaceutic

Industry life cycle analysis

What stage of industry eg Start ph

growth phase, maturity or decline

Structure and characteristics


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Industry analysis

Structure and characteristicsNature of competition

Demand Prospects

Technology and research


Porter: Threat of new entrants, R

among existent firms, substitute p

bargaining power of buyers and se

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Fundamental Analy

To determine the valuation of the sh

analyst must forecast earnings, divi

the appropriate discount rate

Earnings potential and the risk are lthe prospects of the industry and th

developments in the macro econom

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4 Step Process of ana

Strategy analysis

Accounting analysis

Financial analysis

Prospective Analysis (Growth etc)

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others

Order positions

Regulatory framework

Technology capabilities

HR

Evaluation of management “mark of

management is not how it runs its bu

but how it changes them”

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Company Analys Important parameters for analysEPS of the coming years

And a reasonable earnings mgiven the growth prospects, riexposure and other characterthe firm

For this we need historical data

Of Earnings, Growth, Risk andValuation

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Earnings analysi

ROE can be decomposed into

PAT X Sales X As

Sales Assets NW(S PBIT X Sales X PBT X PAT X

Sales Assets PBIT PBT

Op. eff Asset eff, int , tax, Lev

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Other important

calculations

Book Value of the share Paid up capital / number of shares

Earnings per share

PAT / number of Equity shares

Dividend Payout

Equity Dividend / PAT

Dividend per share

Growth performance of sales andEPS(CAGR)

Look out for Beta16


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Stock Price Mode

If Rs. 2 per share is the dividend anROE and .6 is the retention ratio, e

the share price ?

Price = Div per share / ROE –

rate

= 2 / (.15 -.06) = Rs. 22.22

Useful for sensitivity analysis

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KUNAL JOSHI

Intrinsic value using

Ratio

Estimate the future EPS Based on correct forecasting of the

future based on growth assumption

Establish a PE multiple

based on last years earnings or trailing

PE or based on some expected earning

out for similar companies PE

Projected EPS X Projected PE = Va

Anchor

Always give a range

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Strategy for identify

securities

Intrinsic Value > Market Value Bu

Intrinsic Value < Market Value Se

Intrinsic Value = Market Value Ho

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Some keys to inves

Establish Value Anchors Assess the market Price behaviour

(Psychology)

Combine fundamental and technica

Develop sound strategies for growth

Beware of games operators play

Take Swift corrective action ie keep

Have discipline Source: Investment Analysis and Portfolio Mana

Prasanna Chandra

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Thanks

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The Father of Fundamental An

Benjamin Graham

Who was Benjamin

Graham?

Fundamental Analysis: Amethod of evaluating a security

factors. Fundamental analystsattempt to study everything thatcan affect the security's value,including macroeconomic factors(like the overall economy andindustry conditions) andindividually specific factors(like the financial condition andmanagement of companies).

Sources: Security Analysis (Graham and Dodd);The Intelligent Investor (Graham)2

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Ben Graham and Mr. M

Long ago Ben Graham described the mental atmarket fluctuations that I believe to be mostinvestment success. He said that you should imquotations coming from a remarkably accommodatingMr. Market who is your partner in a private businessMr. Market appears daily and names a price at whichbuy your interest or sell you his. Even though the bustwo of you own may have economic characteristics thMr. Market’s quotations will be anything but stable. Fsay, Mr. Market is a fellow who has incurable emotio At times he falls euphoric and can see only the faveffecting the business. When in that mood, he namebuy-sell price because he fears that you will snap uand rob him of imminent gains. At other times he is dcan see nothing but trouble ahead for both the busworld. On these occasions he will name a very low pis terrified that you will unload your interest on him.

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Continued

Mr. Market has another endearing characteristic:mind being ignored. If his quotation is uninterestinghe will be back with a new one tomorrow. Transtrictly at your option. Under these conditions, thedepressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed

or everything will turn into pumpkins and mice: Mthere to serve you, not to guide you. It is his pocketwisdom, that you will find useful. If he shows up sparticularly foolish mood, you are free to either igntake advantage of him, but it will be disastrous if yhis influence. Indeed, if you aren’t certain that yo

and can value your business far better than Mr. Marbelong in the game. As they say in poker, “If you’vgame 30 minutes and you don’t know who the pathe patsy.”

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Graham’s Fundame

Investment Rules

• Adequate Size

• Sufficient Strong Financial Condition

• Earnings Stability

• Dividend Record

• Earnings Growth

• Moderate Price/Earnings Ratio

• Moderate Ratio of Price to Assets

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Graham’s 14 Investment

1. Be an investor, not a speculator.2. Know the asking price.

3. Search the market for bargains.

4. Determine if the stock is undervalued.

5. Regard corporate figures with suspicion.

6. Don’t stress out.

7. Don’t sweat the math.8. Diversify among stocks and bonds.

9. Diversify among stocks.

10. When in doubt, stick to quality.

11. Use dividends as a clue for success.

12. Defend your shareholder rights.

13. Be patient.

14. Think for yourself.

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Philip Fisher

• A company’s ability to grow sales andprofits over the years at rates greater than the industry average.

• In order to do so, a company neededto possess “products or services withsufficient market potential to make itpossible for a sizable increase insales for at least several years.”

• Fisher was not so much concernedwith the consistent annual increase insales in any given year, rather, he judged a company’s success over aperiod of several years. He wasaware that changes in the businesscycle could and would have amaterial effect on sales and earningsin any given year.

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The characteristics of a business that most impresse


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Philip Fisher

• Fisher identified companies that, decadeshowed promise of above-average growtypes of companies that could expectabove-average growth were companies(1) “fortunate and able” and were (2because they are able.”

• Fisher also found that a company’s redevelopment efforts contribute mighsustainability of the company’s abogrowth in sales. Even non-technicalneed a dedicated research effort to proproducts and more efficient services.

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Philip Fisher

• Sales Organization: Fisher also ecompany’s sales organization. Accordincompany could develop outstanding pservices, but unless they weremerchandised,” the research and develowould never translate into revenues.

• Profits and Costs: Fisher also ecompany’s profit margins, its dedmaintaining and improving profit ma

finally, its cost analysis and accountinFisher sought companies that were nlowest-cost producer of products or swere dedicated to remaining that way.

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Peter Lynch’s

1. Don’t be intimidated by experts (ex spurts).

2. Look in your own backyard.

3. Don’t buy something you can’t illustrate witha crayon.

4. Make sure you have the stomach for stocks.5. Avoid hot stocks in hot industries.

6. Owning stocks is like having children. Donot have more than you can handle.

7. Don’t even try to predict the future.

8. Avoid weekend worrying. Do not get scaredout of good stocks. Own your mind.

9. Never invest in a company without firstunderstanding its finances.

10. Do not expect too much, too soon. Thinklong-term.

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Peter Lynch’s Ten Golden Rules of Inve


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Peter Lynch’s

Peter Lynch’s mistakes to avoid1. Thinking that this year will be any

than any other year

2. Becoming too concerned over whstock market is going up or down

3. Trying to time the market

4. Not knowing the story behind the cowhich you are buying stock

5. Buying stocks for the short-term

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Peter Lynch’sLynch Maxim’s:

1. A good company usually increases its dividends ev2. You can lose money in a very short time, but it take

time to make money.

3. The stock market isn’t a gamble as long as you piccompanies that you think will do well and not just b

stock price.4. You have to research the company before you put

5. When you invest in the stock market you should alw

6. You should invest in several stocks (5).

7. Never fall in love with a stock, always have an open

8. Do your homework.

9. Just because a stock goes down doesn’t mean it ca

10. Over the long-term it is generally better to buy stoccompanies.

11. Never buy a stock because it is cheap, but because

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Sir John Marks Temp

Who is Sir John Marks Templeton?John Templeton borrowed $10,000 and started a

brilliant investment career, which enabled him to

be one of two investors to become billionaires

solely through their investment prowess.

Templeton has had decade after decade of 20%

plus annual returns and managed over $6 Billion inassets. Templeton is generally regarded as one of

the world’s wisest and most successful investors.

Forbes Magazine said,

“Templeton is one of a handful of true investment

greats in a field of crowded mediocrity and bloated

reputations.” Templeton holds that the common

denominator connecting successful people with

successful enterprises is a devotion to ethical and

spiritual principles. Many regard Sir John as the

greatest Wallstreet Investor of all time.13 KUNAL JOSHI


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Sir John Mark TempSir John’s 16 Rules for Investment S

1. Invest for maximum total real return incluand inflation.

2. Invest. Don’t trade or speculate.

3. Remain flexible and open-minded about

investments. No one kind of investment is a4. Buy at a low price. Buy what others are selling. Then sell what others are desponde

5. Search for bargains among quality stocks

6. Buy value not market trends or economic

7. Diversify. There is safety in numbers.8. Do your homework. Do not take the worInvestigate before you invest.

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Templeton’s 16 Rule9. Aggressively monitor your investments.

10. Don’t panic. Sometimes you won’t have everythinmarket crashes. Once the market has crashed, donyou find another more attractive undervalued stock t

11. Learn from your mistakes, but do not dwell on them

12. Begin with prayer, you will think more clearly.

13. Outperforming the market is a difficult task, you mmanagers of the largest institutions.

14. Success is a process of continually seeking answequestions.

15. There is no free lunch. Do not invest on sentimen

in an IPO. Never invest on a tip. Run the numbers the quality of management.

16. Do not be fearful or negative too often. For 100 yehave carried the day in U.S. Stocks.

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THANKS

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Technical Analysis OfFinancial Markets

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Background

Main approaches to valuing stocks Risk-return analysis

Fundamental analysis

Technical analysis

Some technicians use only technicawhile others use both fundamental atechnical analysis

Technicians (AKA: chartists) focus

of market prices and transactions st Think that these statistics will reveal all

Technicians study patterns in securi2 Kunal Joshi


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Theoretical Founda

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Edwards & Magee (1997) state the assumptions of technical analysis A security’s market value is based on su

demand Supply and demand are based on both

irrational factors

Security prices tend to move in persiste

Changes in trends occur due to shifts in

demand Shifts in supply and demand can be det

charts of market transactions

Some chart patterns tend to repeat them


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Theoretical Founda

Kunal Joshi4

Technicians believe past patternrecur

Therefore can be predicted

Technical analysts estimate pricWhereas fundamental analysts estimate

Technicians tend to ignore issue

as a firm’s riskiness and earninggrowth

Instead focus on barometers of supply an


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Theoretical Founda

Kunal Joshi5

Technicians claim technical analysis Easier

Faster

Can be applied simultaneously to more st

fundamental analysis But, does technical analysis work?

Technicians argue that when usingfundamental analysis

Must wait until market realizes a stock isundervalued

Must rely on inadequate accounting state

It is hard work

Must use ambiguous estimates of growth


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What is ta?

Forecasting of future financial price movbased on an examination of past pricemovements

Like weather forecasting, does not proviabsolute prediction

Offers a glimpse at where prices are mogo in the future

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General steps to technical evaluati

TOP-DOWNapproach

1. Broad Market

Analysis2. Sector Analysis

3. Individual Security Analysis

The Principles behind

TA are

UNIVERSAL!

Trading Floo7 Kunal Joshi


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Who has made money with ta

Larry Williams, regarded as one of the great tentered a trading competition and returned ovin a year trading TECHNICAL picks

Daughter, actress Michelle Williams returns 1same competition using her fathers strategies

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T masters

Kenneth Griffin, CEO, Citadel Financial uses a coform of TA he programmed to assist in his implem

convertible arbitrage trading strategies Paul Tudor Jones, Tudor Investments inc, Net wo

$9,000,000,000

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The technician’s mission

BEAT THE CROWD!

Markets are 80% psychological andlogical

Thousands and Thousands of peoptheir first trade every day, and 90% have no idea what they are doing

Technicians employ tricks to take adof “Dumb Money”

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Final thoughts

Develop a strategy unique to your perscomfort levels

Tweak your strategy until it works the b

can

Test it using virtual (paper) trading

DO NOT STRAY FROM THE SYSTEM

Remember that 1% every day leads to aa year! A l ittle goes a

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Kunal Joshi12

Thanks


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The Dow Theor

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The Dow Theory

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Charles Dow known as the “Godfath

Dow Theory pieced together from the writings of Charles Do

years


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The Dow Theory

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Originated by Charles Dow Founder of the Dow Jones Company and editorJournal

Dow Theory presumes market moves in pbull and bear trends

Often used for market as a whole, but used for isecurities also

Types of movements defined by Dow theo Primary trends (bull or bear market) Secondary trends (corrections)

Market collapses or upward surges lasting a few w

Tertiary moves (little daily fluctuations) Meaningless random wiggles but should be studie

relate to a primary trend


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The Dow Theory

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Most Dow theorists do not think a new primary trend has been

pattern of ascending or descending tops occur.


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harles dow’s main ideas

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Price Discounts Everything

Price Movements are NOT always ra

“What” more important than “Why”

“You show me the chart and I will telnews.”


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Testing the DOW Th

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Brown, Goetzmann & Kumar (BGK)Dow theory using event study 255 WSJ editorials used as events Neural net estimation used to identify o

trading rules during 1902-1929

Results indicate forecasts based ondiscernable patterns Recent downward trends in DJIA are se DJIA falls from recent peaks are sell sig

Recent upward trends in DJIA are buy s Recoveries from recent declines in DJIA

signals


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Testing the DOW Th

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When a buy or neutral signal wdetected, a hypothetical portfoliinvested in DJIA

When a sell signal was detectehypothetical portfolio is fully invcashTested from 1930-1997 Results indicate that some trend-pred

existed, but not enough to generate lareturns


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Thanks

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Kunal Joshi The Dow Theory Source: Investopedia.com

The Dow Theory

Introduction

Any attempt to trace the origins of technical analysis would inevitably lead to Dow Theory.

While more than 100 years old, Dow Theory remains the foundation of much of what we know

today as technical analysis.

Dow Theory was formulated from a series of Wall Street Journal editorials authored by Charles

H. Dow from 1900 until the time of his death in 1902. These editorials reflected Dow’s beliefs

on how the stock market behaved and how the market could be used to measure the health of

the business environment. Due to his death, Dow never published his complete theory on the

markets, but several followers and associates have published works that have expanded on the

editorials. Some of the most important contributions to Dow theory were William P. Hamilton's

"The Stock Market Barometer" (1922), Robert Rhea's "The Dow Theory" (1932), E. George

Schaefer's "How I Helped More Than 10,000 Investors To Profit In Stocks" (1960) and Richard

Russell's "The Dow Theory Today" (1961).

Dow believed that the stock market as a whole was a reliable measure of overall business

conditions within the economy and that by analyzing the overall market, one could accurately

gauge those conditions and identify the direction of major market trends and the likely

direction of individual stocks. Dow first used his theory to create the Dow Jones Industrial Index

and the Dow Jones Rail Index (now Transportation Index), which were originally compiled by

Dow for The Wall Street Journal . Dow created these indexes because he felt they were an

accurate reflection of the business conditions within the economy because they covered two

major economic segments: industrial and rail (transportation). While these indexes have

changed over the last 100 years, the theory still applies to current market indexes. Much of

what we know today as technical analysis has its roots in Dow’s work. For this reason, all

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traders using technical analysis should get to know the six basic tenets of Dow theory. Let’s

explore them.

The Market Discounts Everything

The first basic premise of Dow Theory suggests that all information ‐ past, current and even

future ‐ is discounted into the markets and reflected in the prices of stocks and indexes. That

information includes everything from the emotions of investors to inflation and interest‐rate

data, along with pending earnings announcements to be made by companies after the close.

Based on this tenet, the only information excluded is that which is unknowable, such as a

massive earthquake. But even then the risks of such an event are priced into the market. It's

important to

note

that

this

is

not

to

suggest

that

market

participants,

or

even

the

market

itself,

are all knowing, with the ability to predict future events. Rather, it means that over any period

of time, all factors ‐ those that have happened, are expected to happen and could happen ‐ are

priced into the market. As things change, such as market risks, the market adjusts along with

the prices, reflecting that new information. The idea that the market discounts everything is not

new to technical traders, as this is a major premise of many of the tools used in this field of

study. Accordingly, in technical analysis one need only look at price movements, and not at

other factors such as the balance sheet. (For more on this, see The Basics Of Technical Analysis.)

Like mainstream technical analysis, Dow Theory is mainly focused on price. However, the two

differ in that Dow Theory is concerned with the movements of the broad markets, rather than

specific securities.

For example, a follower of Dow Theory will look at the price movement of the major market

indexes. Once they have an idea of the prevailing trend in the market, they will make an

investment decision. If the prevailing trend is upward, it follows that an investor would buy

individual stocks trading at a fair valuation. This is where a broad understanding of the

fundamental factors that affect a company can be helpful. It's important to note that while Dow

Theory itself is focused on price movements and index trends, implementation can also

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incorporate elements of fundamental analysis, including value‐ and fundamental‐oriented

strategies. Having said that, Dow Theory is much more suited to technical analysis.

The Three

‐Trend

Market

An important part of Dow Theory is distinguishing the overall direction of the market. To do

this, the theory uses trend analysis. Before we can get into the specifics of Dow Theory trend

analysis, we need to understand trends. First, it's important to note that while the market tends

to move in a general direction, or trend, it doesn't do so in a straight line. The market will rally

up to a high (peak) and then sell off to a low (trough), but will generally move in one direction.

Figure

1:

An

uptrend

An upward trend is broken up into several rallies, where each rally has a high and a low. For a

market to be considered in an uptrend, each peak in the rally must reach a higher level than the

previous rally's peak, and each low in the rally must be higher than the previous rally's low. A

downward trend is broken up into several sell‐offs, in which each sell‐off also has a high and a

low. To be considered a downtrend in Dow terms, each new low in the sell‐off must be lower

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than the previous sell‐off's low and the peak in the sell‐off must be lower then the peak in the

previous sell‐off.

Figure 2: A downtrend

Now that we understand how Dow Theory defines a trend, we can look at the finer points of

trend analysis. Dow Theory identifies three trends within the market: primary, secondary and

minor. A primary trend is the largest trend lasting for more then a year, while a secondary trend

is an intermediate trend that lasts three weeks to three months and is often associated with a

movement against the primary trend. Finally, the minor trend often lasts less than three weeks

and is associated with the movements in the intermediate trend.

Let us now take a look at each trend.

Primary

Trend

In Dow Theory, the primary trend is the major trend of the market, which makes

it the most important one to determine. This is because the overriding trend is the one that

affects the movements in stock prices. The primary trend will also impact the secondary and

minor trends within the market. (For related reading, see Short ‐ , Intermediate‐ and Long‐Term

Trends.)

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Dow determined that a primary trend will generally last between one and three years but could

vary in some instances.

Figure

3:

an

uptrend

with

corrections

Regardless of trend length, the primary trend remains in effect until there is a confirmed

reversal. (For

more

insight,

see

Retracement

or

Reversal:

Know

the

Difference

and

Support

and

Resistance Reversals.) For example, if in an uptrend the price closes below the low of a

previously established trough, it could be a sign that the market is headed lower, and not

higher. When reviewing trends, one of the most difficult things to determine is how long the

price movement within a primary trend will last before it reverses. The most important aspect

is to identify the direction of this trend and to trade with it, and not against it, until the weight

of evidence suggests that the primary trend has reversed.

Secondary, or Intermediate, Trend In Dow Theory, a primary trend is the main direction in

which the market is moving. Conversely, a secondary trend moves in the opposite direction of

the primary trend, or as a correction to the primary trend. For example, an upward primary

trend will be composed of secondary downward trends. This is the movement from a

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consecutively higher high to a consecutively lower high. In a primary downward trend the

secondary trend will be an upward move, or a rally. This is the movement from a consecutively

lower low to a consecutively higher low.

Below is an illustration of a secondary trend within a primary uptrend. Notice how the short‐

term highs (shown by the horizontal lines) fail to create successively higher peaks, suggesting

that a short‐term downtrend is present. Since the retracement does not fall below the October

low, traders would use this to confirm the validity of the correction within a primary uptrend

Figure 4: a secondary trend w/ a primary uptrend

In general, a secondary, or intermediate, trend typically lasts between three weeks and three

months, while the retracement of the secondary trend generally ranges between one‐third to

two‐thirds

of

the

primary

trend's

movement.

For

example,

if

the

primary

upward

trend

moved

the DJIA from 10,000 to 12,500 (2,500 points), the secondary trend would be expected to send

the DJIA down at least 833 points (one‐third of 2,500). Another important characteristic of a

secondary trend is that its moves are often more volatile than those of the primary move.

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Minor

Trend The last of the three trend types in Dow Theory is the minor trend, which is

defined as a market movement lasting less than three weeks. The minor trend is generally the

corrective moves within a secondary move, or those moves that go against the direction of the

secondary trend.

Figure 5

Due to

its

short

‐term

nature

and

the

longer

‐term

focus

of

Dow

Theory,

the

minor

trend

is

not

of major concern to Dow Theory followers. But this doesn't mean it is completely irrelevant; the

minor trend is watched with the large picture in mind, as these short‐term price movements

are a part of both the primary and secondary trends. Most proponents of Dow Theory focus

their attention on the primary and secondary trends, as minor trends tend to include a

considerable amount of noise. If too much focus is placed on minor trends, it can to lead to

irrational trading, as traders get distracted by short‐term volatility and lose sight of the bigger

picture. Stated

simply,

the

greater

the

time

period

a trend

comprises,

the

more

important

the

trend.

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The

Three

Phases

of

Primary

Trends

Since the most vital trend to understand is the primary trend, this leads into the third tenet of

Dow theory, which states that there are three phases to every primary trend – the

accumulation phase (distribution phase), the public participation phase and a panic phase

(excess phase). Let us now take a look at each of the three phases as they apply to both bull

and bear markets.

Primary Upward Trend (Bull Market)

The Accumulation Phase

The first

stage

of

a bull

market

is

referred

to

as

the

accumulation

phase,

which

is

the

start

of

the upward trend. This is also considered the point at which informed investors start to enter

the market. The accumulation phase typically comes at the end of a downtrend, when

everything is seemingly at its worst. But this is also the time when the price of the market is at

its most attractive level because by this point most of the bad news is priced into the market,

thereby limiting downside risk and offering attractive valuations. However, the accumulation

phase can be the most difficult one to spot because it comes at the end of a downward move,

which could be nothing more than a secondary move in a primary downward trend ‐ instead of

being the start of a new uptrend. This phase will also be characterized by persistent market

pessimism, with many investors thinking things will only get worse. From a more technical

standpoint, the start of the accumulation phase will be marked by a period of price

consolidation in the market. This occurs when the downtrend starts to flatten out, as selling

pressure starts to dissipate. The mid‐to‐latter stages of the accumulation phase will see the

price of the market start to move higher.

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A new upward trend will be confirmed when the market doesn't move to a consecutively lower

low and high.

Public Participation Phase

When informed investors entered the market during the accumulation phase, they did so with

the assumption that the worst was over and a recovery lay ahead. As this starts to materialize,

the new primary trend moves into what is known as the public participation phase. During this

phase, negative sentiment starts to dissipate as business conditions ‐ marked by earnings

growth and strong economic data ‐ improve. As the good news starts to permeate the market,

more and more investors move back in, sending prices higher. This phase tends not only to be

the longest lasting, but also the one with the largest price movement. It's also the phase in

which most technical and trend traders start to take long positions, as the new upward primary

trend has confirmed itself ‐ a sign these participants have waited for.

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Primary Downward Trend (Bear Market)

The Distribution Phase

The first phase in a bear market is known as the distribution phase, the period in which

informed buyers sell (distribute) their positions. This is the opposite of the accumulation phase

during a bull market in that the informed buyers are now selling into an overbought market

instead of buying in an oversold market. In this phase, overall sentiment continues to be

optimistic, with expectations of higher market levels. It is also the phase in which there is

continued buying by the last of the investors in the market, especially those who missed the big

move but are hoping for a similar one in the near future. As was the case in the accumulation

phase, the distribution phase can be difficult to spot in its early stages. The reason for this is

that it may be disguised as a secondary downward trend within the primary upward trend.

From a technical standpoint, the distribution phase is represented by a topping of the market

where the price movement starts to flatten as selling pressure increases . The mid to latter

stages of the distribution phase will see prices start to fall as more and more investors,

anticipating weakness, exit their positions. A new downward trend will be confirmed when the

previous trend fails to make another consecutive higher high and low.

Public Participation Phase

This phase is similar to the public participation phase found in a primary upward trend in that it

lasts the longest and will represent the largest part of the move ‐ in this case downward. During

this phase it is clear that the business conditions in the market are getting worse and the

sentiment is becoming more negative as time goes on. The market continues to discount the

worsening conditions as selling increases and buying dries up. This is also the point at which

most

trend

followers

and

technical

traders

start

to

dump

their

positions

and

take

short

positions as the new downward trend has confirmed itself.

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The Panic Phase

The last phase of the primary downward market tends to be filled with market panic and can

lead to very large sell‐offs in a very short period of time. In the panic phase, the market is

wrought up with negative sentiment, including weak outlooks on companies, the economy and

the overall market. During this phase you will see many investors selling off their stakes

in panic. Usually these participants are the ones that just entered the market during the excess

phase of the previous run‐up in share price. But just when things start to look their worst is

when the accumulation phase of a primary upward trend will begin and the cycle repeats itself.

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Market

Indexes

Must

Confirm

Each

Other

Under Dow theory, a major reversal from a bull to a bear market (or vice versa) cannot be

signaled

unless

both

indexes

(traditionally

the

Dow

Industrial

and

Rail

Averages)

are

in

agreement.

For example, if one index is confirming a new primary uptrend but another index remains in a

primary downward trend, it is difficult to assume that a new trend has begun. The reason for

this is that a primary trend, either up or down, is the overall direction of the stock market,

which in Dow theory is a reflection of business conditions in the economy. When the stock

market is

doing

well,

it

is

because

business

conditions

are

good;

when

the

stock

market

is

doing

poorly, it is due to poor business conditions. If the two Dow indexes are in conflict, there is no

clear trend in business conditions. If business conditions cause the major indexes to travel in

opposite directions, this disparity suggests that it will be difficult for a primary trend to develop.

When trying to confirm a new primary trend, therefore, it's vital that more than one index

shows similar signals within a relatively close period of time. If the indexes are in agreement, it

is a sign that business conditions are moving in the indicated direction. Thus, rising indexes

signal a new

uptrend.

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Volume

Must

Confirm

the

Trend

According to Dow Theory, the main signals for buying and selling are based on the price

movements of the indexes. Volume is also used as a secondary indicator to help confirm what

the price movement is suggesting.

From this tenet it follows that volume should increase when the price moves in the direction of

the trend and decrease when the price moves in the opposite direction of the trend. For

example, in an uptrend, volume should increase when the price rises and fall when the price

falls. The reason for this is that the uptrend shows strength when volume increases because

traders are more willing to buy an asset in the belief that the upward momentum will continue.

Low volume during the corrective periods signals that most traders are not willing to close their

positions because they believe the momentum of the primary trend will continue. Conversely, if

volume runs counter to the trend, it is a sign of weakness in the existing trend. For example, if

the market is in an uptrend but volume is weak on the up move, it is a signal that buying is

starting to dissipate. If buyers start to leave the market or turn into sellers, there is little chance

that the market will continue its upward trend. The same is true for increased volume on down

days, which is an indication that more and more participants are becoming sellers in the

market. According to Dow Theory, once a trend has been confirmed by volume, the majority of

money in the market should be moving with the trend and not against it.

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Trend

Remains

in

Effect

Until

Clear

Reversal

Occurs

The reason for identifying a trend is to determine the overall direction of the market so that

trades can be made with the trends and not against them. As was illustrated in the third tenet,

trends move from uptrend to downtrend, which makes it important to identify transitions

between these two trend directions.

In Dow Theory, the sixth and final tenet states that a trend remains in effect until the weight of

evidence suggests that it has been reversed. Traders wait for a clear picture of a trend reversal

because the goal is not to confuse a true reversal in the primary trend with a secondary trend

or brief correction. Remember that a secondary trend is a move in the opposite direction of the

primary trend that will not continue. For example, imagine that the primary trend is up, but the

indexes are currently selling off. If an investor were to take a short position, concluding that the

sell‐off is the start of a new primary downward trend, they could get burned when the primary

trend continues. Unless you can safely conclude, based on the weight of evidence, that the

trend has changed, you will be trading against the trend. As a general rule, this is not a wise

idea, as many have been hurt by trading against the market.

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Dow

Theory

Specifics

So far, we have discussed a lot of the ideas behind Dow theory along with its main tenets. In

this section, we'll take a look at the technical approach behind Dow theory, such as how to

identify trend reversals.

Closing Prices and Line Ranges

Charles Dow relied solely on closing prices and was not concerned about the intraday

movements of the index. For a trend signal to be formed, the closing price has to signal the

trend, not an intraday price movement. Another feature in Dow theory is the idea of line

ranges, also referred to as trading ranges in

other areas of technical analysis. These periods of sideways (or horizontal) price movements

are seen as a period of consolidation, and traders should wait for the price movement to break

the trend line before coming to a conclusion on which way the market is headed. For example,

if the price were to move above the line, it's likely that the market will trend up

Signals and Identification of Trends

One difficult aspect of implementing Dow theory is the accurate identification of trend

reversals. Remember, a follower of Dow theory trades with the overall direction of the market,

so it is vital that he or she identifies the points at which this direction shifts.

One of the main techniques used to identify trend reversals in Dow theory is peak‐and‐trough

analysis. A peak is defined as the highest price of a market movement, while a trough is seen as

lowest price of a market movement. Note that Dow theory assumes that the market doesn’t

move in a straight line but from highs (peaks) to lows (troughs), with the overall moves of the

market trending in a direction. An upward trend in Dow theory is a series of successively higher

peaks and higher troughs.

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Figure 1: Upward Trend

A

downward

trend

is

a

series

of

successively

lower

peaks

and

lower

troughs.

Figure 2: Downward Trend

The sixth tenet of Dow theory contends that a trend remains in effect until there is a clear sign

that the trend has reversed. Much like Newton's first law of motion, an object in motion tends

to move in a single direction until a force disrupts that movement. Similarly, the market will

continue to move in a primary direction until a force, such as a change in business conditions, is

strong enough to change the direction of this primary move.

A reversal in the primary trend is signaled when the market is unable to create another

successive peak and trough in the direction of the primary trend. For an uptrend, a reversal

would be signaled by an inability to reach a new high followed by the inability to reach a higher

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low. In this situation, the market has gone from a period of successively higher highs and lows

to successively lower highs and lows, which are the components of a downward primary trend.

Figure 3: Upward Trend Reversal

The reversal of a downward primary trend occurs when the market no longer falls to lower lows

and highs. This happens when the market establishes a peak that is higher than the previous

peak followed by a trough that is higher than the previous trough, which are the components of

an upward trend.

Figure 4: Downward Trend Reversal

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Current

Relevance

There is little doubt that Dow Theory is of major importance in the history of technical analysis.

Many of its tenets and ideas are the basis of much of what we know today. Aspects of Dow

Theory are

also

incorporated

into

other

theories,

such

as

Elliott

Wave

theory.

However,

since

its

original adaptation and subsequent updates, its relevance as a stand‐alone analytical technique

has weakened. The reason for this has been the advent of more advanced techniques and tools,

which in part build off of Dow Theory, but greatly expand upon it.

One of the bigger problems with the theory is that followers can miss out on large gains due to

the conservative nature of a trend‐reversal signal. As we mentioned previously, a signal is

confirmed when

there

is

an

end

to

successive

highs

(uptrend)

or

lows

(downtrend).

However,

what often happens is that by the time the market has shown a clear sign of reversal, the

market has already generated a large gain. Another problem with Dow Theory is that over time,

the economy ‐ and the indexes originally used by Dow ‐ has changed. Consequently, the link

between them has weakened. For example, the industrial and transportation sectors of the

economy are no longer the dominant parts. Technology, for example, now takes up a

considerable portion of economic production and growth.

This is important because the basis for watching the indexes is that they are the leading

indicators of business conditions. The economy has clearly become more segmented, requiring

the analysis of more indexes, which could greatly reduce the accuracy and timeliness of Dow

Theory analysis. Imagine having to look at six indexes while still adhering to Tenet #4: Indexes

Must Confirm Each Other. Even though there are weaknesses in Dow Theory, it will always be

important to technical analysis. The ideas of trending markets and peak‐and‐trough analysis are

found constantly within technical writings and ideas. Also of importance in Dow Theory is the

idea of emotions in the marketplace, which remains a characteristic of market trends.

Charles Dow and Dow theory helped investors improve their understanding of the markets so

that they could maker better investments and achieve investment success.

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Conclusion

Dow Theory represents the beginning of technical analysis. Understanding this theory should

lead you to a better understanding of technical analysis and of an analyst's view of how markets

work.

Let's recap what we've learned:

• Dow theory was formulated from a series of Wall Street Journal editorials authored by

Charles H. Dow, which reflected Dow’s beliefs on how the stock market behaved and

how the market could be used to measure the health of the business environment.

•

Dow believed that the stock market as a whole was a reliable measure of overall

business

conditions

within

the

economy

and

that

by

analyzing

the

overall

market,

one

could accurately gauge those conditions and identify the direction of major market

trends and the likely direction of individual stocks.

• The market discounts everything.

•

Dow theory uses trend analysis to determine which way the market is headed.

• Primary trends are major market trends.

• Secondary trends are corrections of the primary trend.

•

Primary trends

are

made

up

of

three

phases.

For

an

upward

trend,

these

phases

are:

the

accumulation phase, the public participation phase and the excess phase. For a

downward trend, the three phases are: the distribution phase, the public participation

phase and the panic phase.

• Market indexes must confirm each other. In other words, a major reversal from a bull or

bear market cannot be signaled unless both indexes (generally the Dow Industrial and

Rail Averages) are in agreement.

•

Volume

must

confirm

the

trend.

The

indexes

are

the

main

signals

that

indicate

a

security's movement, but volume is used as a secondary indicator to help confirm what

the price movement is suggesting.

• A trend will remain in effect until a clear reversal occurs.

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• Dow relied solely on closing prices for determining trends, not intraday price

movements.

•

Peak‐and‐trough analysis is a key technique used to identify trends in Dow theory.

•

Since

the

advent

of

Dow

theory,

more

advanced

techniques

and

tools

have

expanded

on

this theory and begun to take its place.

• One problem with Dow theory is that followers can miss out on large gains due to the

conservative nature of a trend‐reversal signal.

• Another problem with Dow theory is that over time, the economy ‐ and the indexes

originally used by Dow ‐ has changed.


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Elliot Wave Theory

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Elliot Wave Theor

Elliot believed that the market ris

series of 5 waves and that a mdeclines in a series of 3 wav

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Elliot Wave Theory

According to the theory, on th

wave a market rises, on wave

declines, begins to rise again third wave. The third wave is fo

by a period of decline known a

fourth wave, and finally comple

rise on the fifth wave.

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Elliot Wave Theory

There is a correction period fo

the five wave sequence. This d

period is referred to as a three

correction. During this time thetheoretically declines for wa

begins to rise for wave B, and

again for wave C.

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Elliot Wave Theory Sim

Wave three: Usually very promine

follows a period of what appears

consolidation, most people trade

wave.

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Wave four: Noted to be very intric

still a consolidation. One of Elliot

rules is that in a 5-wave advance

wave 4 can’t overlap wave 1.

Wave five: Often very active, yet a

point declines and leads to the 3 w

corrective cycle.

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Three Wave Decline:

Wave A: Normally seen as a mino

pullback, of wave 5 of the advance

Wave B: Follows Wave A of the do

and is often hard to spot but shou

in a third wave continuing down.

Wave C: Usually quite significant

many traders see this selling oppo

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Elliot Wave Theory - Exa

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Elliott Waves

Elliot wave theory relies on cycle

cycles

Grand Super cycle

Super cycleCycle

Each cycle consists of 5 moves w

trend (1,3,5 are impulse, 2,4 are c

and 3 that are against the trend. Awave

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Super Cycle

Impulse

Correction

Beginning of

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Impulse (1)

Correction (2)

The Super Cycle comprises the fi

movements of the Grand Super C

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The Super Cycle has an underlyin

of its own

Note that the grand super cycle has two movements, the

movements, the cycle has 34……Fibonacci nu

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Elliot Wave Theory

Drawbacks to the wave counting s

• One man’s wave one, is another’

three. In other words the starting somewhat ambiguous.

•It is easy to count the waves after

occur, but difficult to identify themare occurring.

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Thanks


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Basic Terms

Volatility

Fluctuations

52-week high / low

Price / trading range

Open / closing price

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Charts

Maps price performa

Sheds light on suppldemand

“ investment roadmap

Price / volume relatio

important

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Charting: Types of Ch

line charts

bar charts

point and figure chartscandlestick charts

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Linear Scale Line Ch

Insert Figure 9-1 here.

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Bar Chart


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Point and Figure Ch


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Candlestick Chart

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Chart Basics – Time S

Time Scale

Dates along bottom of chart (varies from se

decades)

Common Types: intraday, daily, weekly, mo

Subtle differences between different time sc

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Chart Basics – Time S

Daily Chart Weekly

Expla

Slide10 KUNAL JOSHI


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KUNAL JOSHI11

You can see that there are subtle differences

charts. In the daily chart, you tend to see more

from day to day. When you graph on a weekl

smooth out the fluctuations somewhat, and in m

you case more easily identify a trend. Some in

to use weekly graphs more because it gives th

overall picture of what’s going on in terms of tre

Time Scale


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Trends are your Frien 1 ) Trend: general direction of stock 2 ) Uptrend: high

higher lows

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Sometimes, trends diffic

see

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HOW TO IDENTIFY TR

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Volume

Amount of shares that trade hands betwee

buyers

Price movements more significant when vo

above average

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Trend Lines

There are three basic

kinds of trends:

An Up trend where pricesare generally increasing.

A Down trend where

prices are generally

decreasing.

A Trading Range.

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Trend lines

Simply put, a line drawn on a chart to repreoverall trend

Upward trend line, connecting the lows, rep

support

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Trend lines

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Trend lines

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Support & Resistan

Support and resistance lines

indicate likely ends of trends.

Resistance results from the

inability to surpass prior highs. Support results from the

inability to break below to prior

lows.

What was support becomes

resistance, and vice-versa. Support

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Simple Moving Avera

A moving average is simplythe average price (usuallythe closing price) over thelast N periods.

They are used to smoothout fluctuations of less thanN periods.

This chart shows MSFTwith a 10-day moving

average. Note how themoving average showsmuch less volatility than thedaily stock price.

30

35

40

45

50

55

60

1 21 41 61 81 101 121

P r i c e

Date

MSFT Daily Prices with 9/23/93 to 9/21/94

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Thanks


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Kunal Joshi Volume

Volume

Volume is simply the number of shares or contracts that trade over a given period of time, usually a day.

The higher the volume, the more active the security. To determine the movement of the volume (up or

down), chartists look at the volume bars that can usually be found at the bottom of any chart. Volume

bars illustrate how many shares have traded per period and show trends in the same way that prices do.

Why Volume is Important

Volume is an important aspect of technical analysis because it is used to confirm trends and chart

patterns. Any price movement up or down with relatively high volume is seen as a stronger, more

relevant move than a similar move with weak volume. Therefore, if you are looking at a large price

movement, you should also examine the volume to see whether it tells the same story.

Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign

of

a

trend

reversal?

This

is

where

volume

helps

traders.

If

volume

is

high

during

the

day

relative

to

the

average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume

is below average, there may not be enough conviction to support a true trend reversal.

Volume should move with the trend. If prices are moving in an upward trend, volume should increase

(and vice versa). If the previous relationship between volume and price movements starts to

deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is in an uptrend but

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Kunal Joshi Volume

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the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs

and may soon end.

When volume tells a different story, it is a case of divergence, which refers to a contradiction between

two different indicators. The simplest example of divergence is a clear upward trend on declining

volume.

Volume and Chart Patterns

The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles,

flags and other price patterns can be confirmed with volume, a process which we'll describe in more

detail later in this tutorial. In most chart patterns, there are several pivotal points that are vital to what

the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal

moments of a chart pattern, the quality of the signal formed by the pattern is weakened.

Volume Precedes Price

Another important idea in technical analysis is that price is preceded by volume. Volume is closely

monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting

to decrease in an uptrend, it is usually a sign that the upward run is about to end.

http://www.investopedia.com/terms/d/divergence.asphttp://www.investopedia.com/terms/h/head-shoulders.asphttp://www.investopedia.com/terms/h/head-shoulders.asphttp://www.investopedia.com/terms/h/head-shoulders.asphttp://www.investopedia.com/terms/h/head-shoulders.asphttp://www.investopedia.com/terms/h/head-shoulders.asphttp://www.investopedia.com/terms/t/triangle.asphttp://www.investopedia.com/terms/f/flag.asphttp://www.investopedia.com/terms/f/flag.asphttp://www.investopedia.com/terms/t/triangle.asphttp://www.investopedia.com/terms/h/head-shoulders.asphttp://www.investopedia.com/terms/d/divergence.asp


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Support / Resistanc

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Chart Analysis : Supp

• Price at which BUYERS > SELLERS consiste• Buyers who missed out on the first dip will be

buy if price continues to respect the support.

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AMZN Example of Sup

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Support Breakdown

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• SELL if support “breaks down”, because it

that BUYERS no longer overpower SELLE

• Breakdowns are a BEARISH SELL signal.

You should have soldhere, at the BREAK

DOWN.


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Chart Analysis : Resista

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• Price at which SELLERS overwhelm BUYERconsistently.

• When a stock makes a new high and then resellers who missed out @ the previous peakpressured to sell when price climbs back to


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TM – Resistance Psych

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Should I sell?? Na, I’lltake my chances.

I should have soldwhen TM was $138!!

Finally! $138. I sell this time


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TGT Resistance Brea

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TGT Resistance Breakout

RESISTANCE BEC

SUPPORT

BREAKOUT!!


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RELIANCE INDUSTRIES

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Thanks


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Moving Averages

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WMA)

Most popular are 50-day and 200-day

Shows the average price of the last # daplots it on a line

Often acts as areas of support and/or re

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WIRE – Support @ 10 W

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CPA – Support at 20 & 5

20 DMA and

becomes po

support for th6 KUNAL JOSHI


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Thanks


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Fibonacci Method

Fibonacci, one of the greamathematicians of all t

discovered a sequence of nwhich are now used acros

disciplines.

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The Fibonacci Seque

Suppose you begin with a pair of ra

Rabbits take one month to matu

Only Mature rabbits can have ofOnce mature, a pair offspring ar

every month

The rabbits never die

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1 Month

One Pair

(Y)

Y = Young, M = Mature

Now

One Pair

(M)

2 Months

Two Pair

(M, Y)

4 Months

Five Pairs

(M, M,Y,Y,M)

5 Months

Eight Pairs

(M,M,M,Y,Y,Y,M,M)

6 Mo

Thirteen P(M,M,M,Y,Y4

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Can you find the Patte

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, …

Each number in the Fibonacci sequence is th

sum of the previous two

1+ 1 = 2

1 + 2 = 3

2 + 3 = 5 ….

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The Golden Numb

Suppose that we divide each number into

number

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………

1/1 = 1 5/8 = .6251/2 = .5 8/13= .615

2/3 = .667 13/21 = .619

3/5 = .6 21/34 = .617

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The Golden Numb

Suppose that we divide each number into

number

1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, ………

1/1 = 1 8/5 = 1.6

2/1 = 1 13/8 = 1.625

3/2 = 1.5 21/13 = 1.615

5/3 = 1.667 34/21 = 1.619

The ratios converge to 1.618 (PHI)

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The Golden Number (.618,

Note that 1 + phi = PHI

However, we also have that

1/phi = PHI

.618 is the basis for Fibonacci me The important numbers are

.618

.382 ( = .618*.618)

.236 (= .618*.618*.618)

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Fibonacci Arcs

Draw an initial trend linebetween two extreme points

Draw arcs t

trend at 61.38.2% of th

The arcs anticipate future

01 Technical Analysis - Level 1 - Kunal Joshi

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