Munjal Mehta. One assumption ◦ HISTORY REPEATS ITSELF One rule ◦ REWARD:RISK should always be 2:1 Two learnings ◦ Technical analysis is SUBJECTIVE.

Munjal Mehta

One assumption◦ HISTORY REPEATS ITSELF

One rule◦ REWARD:RISK should always be 2:1

Two learnings◦ Technical analysis is SUBJECTIVE◦ It should be used alongwith FUNDAMENTAL

ANALYSIS to give the best results

It assumes that the previous price levels shown will act as support and resistances

Supports will become resistances if broken Resistances will become supports if broken

Example◦ One stock worth 10rs.◦ The analyst is bullish about the stock at 10rs.◦ He issues a BUY call with TGT. Of 12rs. And SL

of 9rs.◦ Out of 10 such buy calls given in the month, he

succeeds in only 4 (i.e. 40% accuracy)◦ Still he manages to make money

Technical analysis cannot be a self fulfilling phenomenon

The entire world watches the same charts and the same levels

But still half of them make money and half of them loose

This is because Technical analysis is subjective

The same chart could look bearish to one analyst and bullish to the other

Technical analysis should only be used as a guiding tool

The main use of technical analysis is affirm when to enter the stock

Whether to enter the stock or not is a call to be taken on the basis of fundamental analysis

Take the example of Tata Motors At levels of 140rs stock was highly

undervalued according to fundamentals Then at these levels, even if the technical

indicators might show weakness in the stock, it might not be advisable to issue a sell call

Trends Moving Averages Candlestick Patterns Oscillators (RSI, MACD, Stochastic, etc.) Bollinger bands Pivot points Elliot wave patterns And many more….

Most commonly used tool Uses the previous day’s levels to generate

support and resistance levels for today Ignores the open price of the stock,

because it is subject to bias Mainly used for intraday trading

Pivot point = Yesterday’s (High+Low+Close)/3

S1 = (Pivot point*2) – Yesterday’s High R1 = (Pivot point*2) - Yesterday’s Low S2 = Pivot point – Yesterday’s High +

Yesterday’s Low R2 = Pivot point + Yesterday’s High -

Yesterday’s Low

Trends are a consistent pattern of highs and lows

Can be bullish as well as bearish A series of higher tops and higher bottoms

signifies a bullish trend A series of lower tops and lower bottoms

signifies a bearish trend

A very simple tool in analyzing a particular stock

An ‘n’ day simple moving average, simply calculates the average of the closing prices of the last ‘n’ days

Used to define support and resistance levels

Moving average crossovers are very important in gauging the trend

The larger the value of ‘n’ the more important is the level

I have used the 8, 13 and 21 days moving average alongwith the 50 day moving average

On careful analysis of the chart, you will see that the 50 day moving average has acted as a major support and resistance level in the past

Commonly known as momentum indicators Used to gauge three things:-

◦ Overbought or Oversold conditions◦ Possibility of a Trend Reversal◦ Increase or Decrease in Momentum

Should never be used in Isolation, should always be used alongwith the price chart

An overbought condition is such that the probability of a downmove is quite high

An oversold condition is such that the probability of a upmove or a rally is high

Can be found out by spotting a divergence between price action and the oscillator readings

Divergence means when the scrip and the oscillator moves in the opposite direction

Divergences occurring at the bottom are termed as positive divergences, and vice versa

They are useful only if they occur in overbought or oversold conditions

Rate Of Change (ROC) Relative Strength Index (RSI) Moving Average Convergence Divergence

(MACD) Stochastic

Measures the rate of change between the current price and the price ‘n’ days in the past

The RSI indicates the strength of the scrip relative to itself

RSI = 100 – 100/(1+Rs) Where Rs = Avg. daily gain / Avg. daily loss The time period normally selected is 14

days

This indicator measures plots the difference between a short term moving avg. and a long term moving avg.

If the short term avg. is higher than the long term avg., the indicator is positive

If the indicator is positive and moves below the zero level, It indicates a possible change in trend

The stochastic oscillator works on the principle that the stock prices close near the high price of the day when the trend is bullish and vice versa

It consists of 2 components:-◦ %K = 100 (C-L5)/(H5-L5)◦ %D = moving average of the %K line