Technical analysis OF STOCK MARKET presentation of mba 4 sem FINANCE PPT

Technical Analysis

4/10/2013 Babasabpatilfreepptmba.com

Technical Analysis

Technical Analysis is the forecasting of future financial

price movements based on an examination of past price

movements. technical analysis can help investors anticipate

what is "likely" to happen to prices over time. Technical

analysis uses a wide variety of charts that how price over

time.

Definition 1: A method of evaluating future security prices and market directions based on statistical analysis of variables such as trading volume, price changes, etc., to identify patterns.

Definition 2: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.


Assumptions of Technical

Analysis

Market Action discounts everything

Supply Vs. Demand factors.

Fundamental, Political and Psychological factors.

Prices move in trends

Identify new and existing trend.

Prices move in trends– Trend in motion is more likely to continue than to reverse.

History repeats itself

Future is the repetition of past


Technical Analysis

Most Significant Assumptions:

Stock prices move in trends that persist for long periods

These trends can be detected in charts

Thus past trends in market movements can be used to

forecast or understand the future.

The lag between the time a technical analyst perceives a

change in the value of a security and when the investing

public ultimately assesses this change provides a profit

opportunity to the chartist


Technical Vs. Fundamental

Fundamental:

Study the cause of market movement.

Supply-demand factor.

Government interventions.

Technical:

Study the effect of movement.

Charts, price, volume, Trend


Advantages Of Technical Analysis :

•Its quick and easy

• It does not involve data and accounting problems

• It incorporates psychological as well as economic

reasons behind price changes

• It tells when to buy ; not why investors are buying

Disadvantages Of Technical Analysis :

• Efficient market followers say it doesn’t work

• If it worked it would self destruct.

• It is too subjective to be of any real use


Technical Analysis

Tools to project future market movements

Charting

Key indicator series


Theories Supports Technical

Analysis

Dow Theory

Assumptions:

Averages discounts everything.

The market has three trends.

Major trend have three phases.

Volume must confirm the trend.

ElliotWave Theory Elliott Wave Theory, which states that security prices are

governed by cycles founded upon the Fibonacci series (1-2-3- 5-8-13-21...).


Technical Analysis Use of Charting

Often linked to development of the Dow Theory in the late

1890s by Charles Dow

Generally believed successful in signaling the market crash

of 1929

Essential Elements of the Dow Theory

There are 3 major movements in the market:

1. Daily fluctuations

2. Secondary movements (two weeks to a month)

3. Primary trends (long term)

May be bullish or bearish in nature

Daily fluctuations and secondary movements only

important to extent they reflect on the persistence of

the long term primary trend



Presentation of the Dow Theory:

Example of use to analyze a trend

Chart shows positive primary trend despite two secondary downward trends

Bullish primary trend is confirmed by the increases in the levels of secondary lows and highs

Pattern assumed to persist long term but ultimately to end



Presentation of the Dow Theory:

Market reversal and confirmation Ultimate end of a bullish trend

detected by a new pattern:

Recovery fails to exceed

previous high (Abortive

recovery) +

New low penetrates a

previous low +

New pattern confirmed by

subsequent movement in

Dow Jones Transportation

Average


Types of Charts

Line Chart.

Candlesticks chart.

Bar Chart.

Point & Figure Chart.

Candlesticks charts have become very popular among all chartist.


Line Chart.

Line graph represents a continuous line, connecting the closing prices

Line graph is also used when considering the volume and open interest

indicators. 4/10/2013 Babasabpatilfreepptmba.com

Bar Chart


The Bar Chart

(Continued)

Some of the most

popular type of

charts

Advantage is that it

show the high, low,

open and close for

each day


The Bar Chart

(Continued)


Candlesticks Chart


Candle Stick Charting

(Continued)

Been around for hundreds of years

Often referred to as ―Japanese Candles‖ because the Japanese would use them to analyze the price of rice contracts

Similar to bar chart, but uses color to show if stock was up (green) or down (red) over the day

More than 20 patterns are used by technicians for candlestick charting. Some of the most popular include the following.



(Continued)



(Continued)

Green is an example

of a bullish pattern,

the stock opened at (or

near) its low and

closed near its high

Red is an example of a

bearish pattern. The

stock opened at (or

near) its high and

dropped substantially

to close near its low



(Continued)

Top example is called a hammer and is a bullish pattern only if it occurs after the stock price has dropped for several days. Theory is that pattern

indicates a reversal

Bottom is an example of a star, typically indicating a reversal and/or indecision.


Charts


Point & Figure chart

X's represent increasing prices . O's represent decreasing prices.

Does not consider open and close prices.


Point and Figure Chart

Somewhat rare

Plots day-to-day increases and declines in price.

A rising stack of XXXX‘s represents increases

A rising stack of OOOO‘s represents decreases.

Typically used for intraday charting

If used for multi-day study, only closing prices will be used



(continued)



(continued)

Helps to filter out less-significant price movements allowing analyst to focus on most important trends

Used to keep track of emerging price patterns

No time dimension

Two attributes affecting the appearance of a point & figure chart

Box size

Reversal amount


What are moving averages?

An average of a number of specified historical time periods from the point on the chart. Moving averages offer an indication of the clear direction and slope of the trend in the market.

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).

SMA is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price.

EMA in order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages).


Using the Moving Average

Shows the average value of a security‘s price over a period of time

Using compared or used in conjunction with EMA (see discussion below)

The most commonly used averages are of 20,30,50, 100 and 200 days

The longer the time span, the less sensitive the moving average to daily price changes

Moving averages are used to emphasize the direction of a trend and smooth out price and volume fluctuations (―noise‖).


Moving Average


Moving Average (Continued)

Notice in April when the stock price dropped well

below its 5-day average (the green line).

Bearish signal

February it rose above its 50-day average and

continued to rise for several weeks

Bullish signal

Typically, when a stock moves below its moving

average it is a bad sign, above it is a good sign


Moving Average (Continued)

What do the different days mean?

20 days - choppy line. It isn't the most accurate, but is probably the most useful for short term traders.

30 day - similar to 20 day but provides a bit more certainty for the trend.

50 day - moving averages provide a much less volatile, smooth line. This can be used to detect somewhat longer term trends.

100 day - similar to the 50 day, it is less volatile, and one of the most widely used for long term trends.

200 day - even less volatile, more of a rolling chart or smooth line. It doesn't react to quick movements in the stock price therefore it is rarely used.


Strategies for Moving Averages

Filters

Used to increase confidence about an indicator

No set rules or things to look out for when filtering, just whatever makes you confident enough to invest your money

For example you might want to wait until a security crosses through its moving average and is at least 10% above the average to make sure that it is a true crossover.

Remember, setting the percentile too high could result in "missing the boat" and buying the stock at its peak.

Another filter is to wait a day or two after the security crosses over, this can be used to make sure that the rise in the security isn't a fluke or unsustained.

Again, the downside is if you wait too long then you could end up missing some big profits.

When current price crosses the average a trading signal occurs

Bullish signal when the current price rises above the moving average

Bearish sign when the current price falls below the moving average


Strategies for Moving Averages

(Continued)

Crossovers

Not as easy as filtering

Several different types of crossover's, but all of them involve two or more moving averages.

In a double crossover you are looking for a situation where the shortest MA crosses through the longer one. This is almost always considered to be a buying signal since the longer average is somewhat of a support level for the stock price.

For extra insurance you can use a triple crossover, whereby the shortest moving average must pass through the two higher ones. This is considered to be an even stronger buying indicator.

Notice this happened in May for APPX


Exponential Moving Averages

(EMA)

Calculated by applying a percentage of today's closing price to yesterday's moving average value.

Use an exponential moving average to place more weight on recent prices.


SMA & EMA Chart..


Approaches of Technical

Analysis

Supports & Resistances

Pivot Analysis

Trend Channel Supports & Resistances

Trend line theory

Fibonacci method

GANN Theory

Bollinger Band

Patterns

Continuation and Reversal

Market Indicators

Volume indicators

Momentum indicators


Support and Resistance Levels

Price levels at which movement should stop and reverse direction.

Act as floor and ceiling

Different strengths (major and minor)

Support

Price level below the current market price at which buying interest should be able to overcome selling pressure and thus keep the price from going any lower

Resistance

Price level above the current market price, at which selling pressure should be strong enough to overcome buying pressure and thus keep the price from going any higher


Resistance and Support One of two things can happen when stock approaches

resistance/support

Can act as a reversal

point

When price drops to a

support level, it will go

back up

When price rises to a

resistance level, it will

go back down

Support/Resistance reverse roles once penetrated.

Market price falls below a support level, then the former support level becomes a resistance level when the market later trades back up to that level


Trend Channel Supports &

Resistances

AMZN retraces from a monstrous rally to

$60


Support Breakdowns

SELL if support “breaks down”, because it

signifies that BUYERS no longer overpower

SELLERS.

Breakdowns are a BEARISH SELL signal.

You should have sold here,

at the BREAK DOWN.


Chart Analysis : Resistance

Price at which SELLERS overwhelm

BUYERS consistently.

When a stock makes a new high and

then retraces, sellers who missed out @

the previous peak will feel pressured to sell

when price climbs back to that level.


TGT Resistance Breakout

RESISTANCE BECOMES

SUPPORT

BREAKOUT!!


Trend line theory

Fibonacci Theory:

The Fibonacci numbers are 0, 1, 1, 2, 3, 5, 8, 13, ...

The series proceeds, any given number is 1.618 times the preceding number and 0.618% of the next number. (34/55 = 55/89 = 144/233 =0.618) (55/34 =89/55 =233/144 =1.618), and1.618 =1/0.618.

The other Fibonacci numbers are 0.382 and 0.50 commonly used in technical analysis have a less impressive background but are just as powerful in Technical analysis.

0.382=(1-.618)=(0.618*0.618), and 0.5 is the mean of the two numbers.


Fibonacci numbers are commonly used in Technical Analysis with or

without a knowledge of Elliot wave analysis to determine potential

support, resistance, and price objectives


GANN Theory

Features:

Price, time and range are the only three factors to consider

The markets are cyclical in nature

Based on these three premises, Gann's strategies revolved around three general areas of prediction

Price study– This uses support and resistance lines, pivot points and angles.

Time study – This looks at historically reoccurring dates, derived by natural and social means

Pattern study – This looks at market swings using trend lines and reversal patterns


GANN Theory

Gann noted that there was a relationship between the extent of a price movement and the time the price took to reach its new level. If a share price moves one unit of price per one unit of time this results in a trend line of 45 . Gann described this as a 1 x 1 relationship or squaring of price and time.

Gann reasoned that if the price breaks through the trend line the new trend line will have a mathematical relationship with the original one. For example, it could be 2x, 3x or 4x the price or it could be 1/2, 1/3, or 1/4 of the original.

A Gann chart uses a series of parallel horizontal lines which act as price targets together with a series of trend lines which fan out at the various Gann ratios from the start of a trend.


Gann Angle..


Gann Chart…


Bollinger Band

Identify overbought & oversold markets.

Used in combination with oscillator for buy/sell

signals.

With other indicators they can warn of impending

price moves.

With other indicators they can signal potential tops

& bottoms.


Bollinger Band chart


Bollinger Band

A simple moving average in the middle (sometimes

omitted)

An upper band (SMA plus 2 standard deviations)

A lower band (SMA minus 2 standard deviations)

Standard deviation is a statistical tool that provides

a good indication of volatility. The bands react

quickly and reflect periods of high and low

volatility.


Bollinger Band

Closing prices are most often used to compute Bollinger Bands.

Other variations, including typical and weighted prices, can also

be used.

Typical Price = (high + low + close)/3

Weighted Price = (high + low + close + close)/4

Bollinger recommends using a 20-day simple moving average for

the center band and 2 standard deviations for the outer bands.

The length of the moving average and number of deviations can

be adjusted to better suit individual preferences and specific

characteristics of an instrument


Bollinger Band chart

Double bottom buy: A double bottom buy signal is given

when prices penetrate the lower band and remain above the

lower band after a subsequent low forms.

Double top sell: A sell signal is given when prices peak

above the upper band and a subsequent peak fails to break

above the upper band. The bearish setup is confirmed when

prices decline below the middle band


Chart Patterns….

Identifying chart patterns is simply a form of

technical analysis

Research has proven that some chart patterns have

high forecasting probabilities.

Two types of chart pattern…

Continuation.

Reversal.


Continuation Pattern…

Continuation pattern is nothing but

continuation of the trend.

Triangles.

(Ascending, Descending & Symmetric)

Flags & Pennants.

GAP Theory.


Ascending Triangle:

Ascending triangles are

generally considered

bullish and are most

reliable when found in an

uptrend.

The top part of the triangle

appears flat, while the

bottom part of the triangle

has an upward slant


Descending Triangle:

The descending triangle is

generally considered to be

bearish and is usually

found in downtrends.

The top part of the triangle

has a downward slant and

the bottom is flat.


Symmetric Triangle.

Symmetrical triangles can

be characterized as areas of

indecision.

A market pauses and future

direction is questioned.

Eventually, this indecision

is met with resolve and

usually explodes out of this

formation (often on heavy

volume.)


Flags & Pennants…

Flags and pennants can be categorized as continuation

patterns.

Usually represent only brief pauses in a dynamic market.

They are typically seen right after a big, quick move.

The market then usually takes off again in the same

direction.

Bullish flags are characterized by lower tops and lower

bottoms, with the pattern slanting against the trend. But

unlike wedges, their trend lines run parallel.


Flags & Pennants…

Bearish flags are comprised of higher tops and

higher bottoms. "Bear― flags also have a tendency

to slope against the trend.

Pennants look very much like symmetrical

triangles. But pennants are typically smaller in size

(volatility) and duration.

Volume generally contracts during the pause with

an increase on the breakout.


Flags & Pennants…

Charts…


GAP Theory…

A gap is an area on a price chart in which there were no

trades.

Normally this occurs after the close of the market on one

day and the next day's open.


Types of Gaps…

Common Gaps

A trading gap or an area gap, the common gap is usually

uneventful.

They appear in trading range or congestion area.

Continued…


Breakaway Gaps

Occur when the price action is breaking out of their trading

range or congestion area. (Price range in which market has

traded for some period of time.)

Volume increases instantly.


Runaway Gaps

Increase interest in the security. Represents traders who

failed to get into the security during initial move.


Exhaustion Gaps

Starts near the end of a good up or down trend.

Signals the end of the move.


Reversal Patterns…

Double top

Double bottom

Triple top/bottom

Rounding tops/ Bottom

Head & Shoulder.

Wedges


Double top

Double Tops appear on a chart in the shape of the letter "M"

and are quite common.

Volume is important to confirm the formation. (Greater volume in the 1st peak than the 2nd one.


Double bottom

A double bottom is the opposite of a double top and appears

as a letter "W" on a chart.

Volume (Greater volume in the 2nd peak than the 1st one.)

Occurs when a stock price drops to a similar price level twice within a few weeks or months

Buy when the price passes the highest point in the handle.

In a perfect double bottom, the second decline should normally go slightly lower than the first decline to create a shakeout of jittery investors

The middle point of the ―W‖ should not go into new high ground.

This is a very bullish indicator


Double bottom chart


Rounding tops/ Bottom

The rounding top reflects the market's perception that the

underlying

fundamentals driving the prices are changing, but the turn is

markedly slow.


Triple top/bottom

The triple top is a reversal pattern made up of three equal

highs followed by a

break below support. In contrast to the bottom.


Cup and Handle

Pattern on bar chart as short as 7 weeks or as long as 65 weeks

Cup in the shape of a U; Handle has a slight downward drift

Right hand side of pattern has low trading volume

As the stock comes up to test old highs, the stock will incur selling pressure by the people who bought at or near the old high

Selling pressure will take the stock price sideways for 4 days to 4 weeks, then it takes off


Cup and Handle


Head & Shoulder.

A technical analysis term used to describe a chart formation

in which a stock‗s price:

1. Rises to a peak and subsequently declines.

2. Then, the price rises above the former peak and again

declines.

3. And finally, rises again, but not to the second peak, and

declines once more.

The first and third peaks are shoulders, and the second peak

forms the head.

The "head-and-shoulders" pattern is believed to be one of

the most reliable trend-reversal patterns.


Head and Shoulders Patterns

Head and shoulders is a reversal pattern that, when formed,

signals the security is likely to move against its previous

trend.

The signal appears to be most reliable (?) in detecting a

reversal of an uptrend.

A Head and Shoulders pattern consists of four distinct parts:

The left shoulder, the head, the right shoulder, and the

neckline. Each of these four must be present for the

formation to exist.

In addition, the volume pattern must also meet strict

requirements. Volume must show a peak on the left

shoulder, a lower peak at the head, and then an even lower

level at the right shoulder. 4/10/2013 Babasabpatilfreepptmba.com

Head and Shoulder Formation

Left Shoulder: A high volume rally and top

followed by a minor reaction with

significantly less volume than during the rise

and top.

Head: Another high volume rally with the

top reaching a higher level than the left

shoulder, followed by a another reaction on

less volume that takes the price to a level near

the bottom of the previous reaction.

Right Shoulder: A third rally on noticeably

less volume that fails to reach the top of the

head.

Neckline: A decline in prices from the top of

the right shoulder which falls below the line

formed when connecting the bottoms of the

left shoulder and head by at least 2-3% of the

stock's market value.

Head and Shoulders as a Reversal

Pattern in an Uptrend


Head and Shoulders: Archer

Daniels


Technical Analysis: Foreign

Exchange


Key Indicator Series

A number of technical indicator series may

be watched for bearish ( )and bullish ( )

trends

Contrary opinion rules

Smart money rules

Overall market indicators


Suggest observing unsuccessful market

behavior and choosing a contrary position:

Odd-lot Theory

Short Sales Position

Investment Advisory Recommendations

Put-Call Ratio

Contrary Opinion Rules


Contrary Opinion Rules:

Odd-Lot Theory

An odd-lot trade is one of less than 100 shares — only small investors tend to engage in odd-lot transactions

This theory suggests watching what the small investor is doing and then do the opposite

The weekly Barron’s reports odd-lot trading on a daily basis in its ―Market Laboratory – Stocks‖ section

It is easy to construct a ratio of odd-lot purchases to odd-lot sales


http://www.barrons.com/

http://www.barrons.com/


Odd-Lot Theory

Here, the odd-lot trader is

on the correct path as the

market is going up (net

selling position) but

becomes a net buyer

preceding a fall in the

market


The odd-lot trader is also presumed to be a strong seller

right before the bottom of a bear market

A corollary to the odd-lot theory says that Monday odd-lot

trades are particularly suspect

The theory actually suggests the small trader does all right

most of the time but badly misses on key market turns

While the odd-lot theory appeared to have some validity in

the 1950s and 1960s, it was not particularly valuable in

more recent decades.

However, odd-lot traders outguessed many professional

traders in the mid-1970s and late 1980s as well as in

October 1997 and in the fall of 2003


Odd-Lot Theory


A rule based on the volume of short sales in the market

[A short sale represents the selling of a security you do not own with the anticipation of purchasing the security in the future to cover your short position]

The contrary opinion stems from two sources:

Short seller are sometimes emotional and may overreact to the market, and more importantly

There is now a built-in demand for stocks that have been sold short by investors who will have to repurchase shares to cover their short positions




When the number of short sellers is large (i.e., they are

bearish), this is thought to be a bullish signal

Technical analysts compute a ratio of

total short sales positions on an exchange to average daily

exchange volume for the month

Normal ratio is between 2.0 and 3.0

A ratio of 2.5 indicates current short sales are equal to 2

½ times the day‘s average trading volume

As the ratio (called the short interest ratio) approaches

the higher end of the normal range, this would be

considered bullish

Use of the ratio has produced mixed results




A further contrary opinion rule:

Watch the predictions

of investment advisory services

and do the opposite Investors Intelligence has formalized this into an Index of

Bearish Sentiment:

When 60% or more of advisory services are bearish, expect

a market upturn

When only 15% or fewer are bearish, expect a decline in the

market


Investment Advisory Recommendations



Put-Call Ratio

ILL-CONCEIVED speculation in the options market suggests that a ―put-call‖ ratio may tell you to do the opposite of what option traders are doing

Puts and calls represent options to buy or sell stock over a specified period of time at a given price:

A put is an option to sell

A call is an option to buy



Put-Call Ratio

The ratio of put (sell) to call (buy) options is normally about 0.60 – there are generally fewer traders of put options than call options

When the ratio gets up to 0.65 to 0.70 or higher, this

indicates increasing pessimism by option traders and the

contrary rules suggests a buy signal

When the ratio goes down to 0.40, decreasing pessimism

(increasing optimism) may indicate that it is time to sell if

you are a contrarian

The put-call ratio has a better than average record for calling

market turns.


Smart Money Rules

Market technicians have long attempted to track the pattern of

sophisticated traders in the hope that they might provide

unusual insight into the future:

Theories related to bond market traders (e.g., Barron‘s

Confidence Index), and

Theories related to stock market specialists (e.g., short sales

by specialists)

Barron‘s Confidence Index=

Yield on 10 top-grade corporate bonds X 100

Yield on 40 intermediate-grade bonds


Smart Money Rules:

Barron’s Confidence Index

This index is used to observe the trading pattern of investors

in the bond market on the premise that they are more

sophisticated than stock traders and pick up trends more

quickly

The theory suggests that a person who can figure out what

bond traders are doing today may be able to determine what

stock market investors will be doing in the near future

As top-grade bonds pay smaller yields than intermediate-

grade bonds, the Confidence Index is always below 100%

Normal trading range is between 80 and 96


Smart Money Rules:


If bond investors are bullish about future economic

prosperity, they are rather indifferent between

holding top-grade and intermediate-grade bonds

the yield differences between the two categories

will be relatively small

Confidence Index near 96


Smart Money Rules:


10 Top Grade Bonds yielding 8.4% while 40

Intermediate Grade Bonds yield 9.1%:

Barron’s Confidence Index = x 100 = 92%

Investors become quite concerned about the

economy‘s future health and will invest in lower-

quality bond issues only at a sufficiently high yield

differential to justify the risk – the gap widens:

Barron’s Confidence Index = x 100 = 83%

8.4%

9.1%

8.9%

10.7%


Smart Money Rules:


Market technicians assume there are a few months of lead

time between what happens to the Confidence Index and

what happens to the economy and stock market

The Confidence Index has a mixed record of predicting

future events

This mixed record may partly be due to the fact that the

supply of new bond issues can influence yields as much as

investor attitudes (demand)


Smart Money Rules:

Short Sales By Specialists

Because of the uniquely close position of specialists to the

action on Wall Street, market technicians ascribe unusual

importance to their decisions

Frequently monitored is the ratio of specialists‘ short sales

to the total amount of short sales

The normal ratio of specialists‘ short sales to the total

amount of short sales on an exchange is about 45%

If the ratio goes above 50%, technicians interpret this as a

bearish signal

If the ratio falls below 40%, technicians consider this bullish


Overall Market Rules

Breadth of the Market

Attempts to measure what a broad range of securities are doing compared to a market average

Advance-declines are often compared with movement of a popular market average

Cash Position of Mutual Funds

Indicates their buying potential

Is generally representative of the purchasing potential of other large institutional investors


Breadth of the Market

Compare advance-declines:

The number of stock prices which are rising compared

to those declining relative to movements in a stock

market average as a potential signal of a turning point

in the market

E.g., if the Dow-Jones Industrial Average (DJIA) is

rising while the number of daily declines consistently

exceeds the number of daily advances, this might

signal the end of a bull market. Why? Although

conservative investors are investing in blue-chip

stocks, there is a lack of a broad-based confidence in

the market


future weakness in

the market is signaled

by a strength in the

DJIA that is not

reflected in the

advance-decline data


When the DJIA is going down but advanced

consistently lead declines, the market may be posed

for recovery

Weighted averages calculated of daily

advances/declines are also used

Comparisons may provide insights but also false signals – care in interpretation should include a look at a wide range of variables

Decimalization of stock prices in 2001 may have caused the advance-decline measure to lose some of its usefulness as an advance or decline of only a penny is all that is now needed to make the list

(You could, with effort, make up your own measures)


Cash Position of Mutual Funds

Between 5 - 20% as a percent of total assets

At the lower end of this range, mutual funds appear to be fully invested and can provide little in the way of additional purchasing power

As their cash position goes to 15% or higher, this might represent significant purchasing power that might help trigger a market upturn

While the overall premise is valid, problems arise in identifying significant cash positions for mutual funds in a given market cycle


Market Indicators

Volume Indicators:

Volume Price Trend Indicator (VPT): A technical indicator

consisting of a cumulative volume line that adds or subtracts

a multiple of the percentage change in security prices trend

and current volume, depending upon their upward or

downward movements.

This indicator is used to determine the balance between a

security‘s demand and supply. The percentage change in the

share price trend denotes the relative supply or demand of a

particular security, while volume indicates the actual size of

the forces


Momentum Indicators:

Momentum is the changing velocity of a price when related

to security analysis. Momentum indicators are designed to

track momentum in the price of a tradable to help identify

the relative enthusiasm of buyers and sellers involved in the

price trend development.

Types of Momentum indicators:

Relative Strength Index (RSI)

Moving Average Convergence and Divergence (MACD)

Stochastic Oscillator


Relative Strength Index:

A technical momentum indicator that compares the

magnitude of recent gains to recent losses in an attempt to

determine overbought and oversold conditions of an asset.

100

formula: RSI = 100 - ---------

1+RS

RS = Average of x days' up closes / Average of x days'

down closes



The RSI ranges from 0 to 100. An asset is deemed to be

overbought once the RSI approaches the 70 level, meaning

that it may be getting overvalued and is a good candidate for

a pullback. Likewise, if the RSI approaches 30, it is an

indication that the asset may be getting oversold and

therefore likely to become undervalued

When talking about the strength of a stock there are a few

different interpretations, one of which is the RSI. The RSI is

a comparison between the days that a stock finishes up

against the days it finishes down.



The RSI ranges from 0 to 100. A stock is considered

overbought around the 70 level and you should consider

selling. This number is not written in stone, in a bull market

some believe that 80 is a better level to indicate an

overbought stock since stocks often trade at higher

valuations during bull markets.

Likewise, if the RSI approaches 30 a stock is considered

oversold and you should consider buying. Again, make the

adjustment to 20 in a bear market.

The shorter number of days used, the more volatile the RSI

is and the more often it will hit extremes. A longer term RSI

is more rolling, fluctuating a lot less. Different sectors and

industries have varying threshold levels when it comes to

the RSI.



Stocks in some industries will go as high as 75-80 before

dropping back and others have a tough time breaking past

70.

A good rule is to watch the RSI over the long term (1 year

or more) to determine what level the historical RSI has

traded at and how the stock reacted when it reached those

levels.


RSI Chart


Money Flow Index

Measures the strength of money flowing into and out of a stock

Difference between money flow index and RSI is that RSI only looks at prices, Money Flow also looks at volume

Ranges from 0 to 100

Overbought at 70

Oversold at 30


Money Flow Index


MACD…

The most popular formula for the "standard" MACD is the difference

between a security's 26-day and 12-day exponential moving averages.

Usually, a 9-day EMA of MACD is plotted along side to act as a trigger

line.

A bullish crossover occurs when MACD moves above its 9-day EMA

and a bearish crossover occurs when MACD moves below its 9-day

EMA

The Moving Average Convergence / Divergence (MACD) is a trend

following momentum indicator that shows the relationship between

two moving averages of prices.

The basic MACD trading rule is to sell when the MACD falls below

its 9 day signal line and to buy when the MACD rises above the 9 day

signal line.


MACD…

The MACD is the difference between a 26-day and 12-day

exponential moving average. A 9-day exponential moving average,

called the "signal" (or "trigger") line is plotted on top of the MACD to

show buy/sell opportunities.

Three Ways of Interpreting the MACD:

1. Crossovers - When the MACD falls below the signal line it is a

signal to sell. Vice versa when the MACD rises above the signal

line.

2. Divergence - When the security diverges from the MACD it

signals the end of the current trend.

3. Overbought/Oversold - When the MACD rises dramatically

(shorter moving average pulling away from longer term moving

average) it is a signal the security is overbought and will soon

return to normal levels.


MACD Chart…


Stochastic Oscillator

The Stochastic Oscillator is a momentum indicator that

shows the location of the current close relative to the

high/low range over a set number of periods. Closing levels

that are consistently near the top of the range

indicate accumulation (buying pressure) and those near the

bottom of the range indicate distribution (selling pressure).

Three types of Stochastics: Fast (%k), Slow (%D) and Full.


Calculation:


Stochastic Chart


Technical analysis OF STOCK MARKET presentation of mba 4 sem FINANCE PPT

Economy & Finance