Technical Analysis

By:
Rashmi Bhandari
What Is Technical Analysis?

 Technical analysis is a method of evaluating

securities by analyzing the statistics
generated by market activity, such as past
prices and volume. Technical analysts do not
attempt to measure a security's intrinsic
value, but instead use charts and other tools
to identify patterns that can suggest future
activity.
Assumptions

1.     The market discounts everything.

2.     Price moves in trends.

3.     History tends to repeat itself.

Chart Patterns

 Charts reveal certain patterns that are of

predictive value. Chart patterns are used as a
supplement to other information and
confirmation of signals provided by trend
lines.
V- Formation

The name itself indicates that in the ‘V’

formation there is a long sharp decline and a fast
reversal. The ‘V’ pattern occurs mostly in popular
stocks where the market interest changes
quickly from hope to fear and vice-versa. In the
case of inverted ‘^’ the rise occurs first and
declines.
There are extended ‘V’s. In it, the bottom or top
moves more slowly over a broader area.
Double top
and bottom

This type of a formation signals

the end of one trend and the
beginning of another. If the
double top is formed when a
stock price rises to a certain
level, falls rapidly, again rises to
the same height or more, and
turns down. Its pattern
resembles ‘M’. The double top
may indicate the onset of the
bear market. But the results
should be confirmed with
volume and trend.
Double top
and bottom

In a double bottom, the price of

the stock falls to a certain level
and increase with diminishing
activity. Then it falls again to the
same or to a lower price and
turns up to a higher level. The
double bottom resembles the
letter ‘W’. Technical analysts
view double bottom as a sign
for bull market.
Head and
shoulders

This pattern is easy to

identify and the signal
generated by this pattern is
considered to be reliable. In
the head and shoulder
pattern there are three
rallies resembling the left
shoulder, a head and a right
shoulder. A neckline is drawn
connecting the lows of the
tops. When the stock price
cuts the neckline from
above, it signals the bear
market.
Inverted head
and shoulders

Here the reverse of the

previous pattern holds true.
The price of stock’s falls and
rises that makes an inverted
right shoulder. As the process
of fall and rise in price
continues the head and left
shoulders are created.
Connecting the tops of the
inverted head and shoulders
gives the neckline. When the
price pierces the neckline
from below, it indicates the
end of bear market and the
beginning of the bull market.
These patterns have to be
confirmed with the volume
and trend of the market.
 Point and Figure chart
A chart that plots day-to-day price movements without taking into consideration the
passage of time. Point and figure charts are composed of a number of columns that
either consist of a series of stacked Xs or Os. A column of Xs is used to illustrate a
rising price, while Os represent a falling price. Point and figure (p&f) charts provide a
simple, yet disciplined method of identifying current or emerging trends in stock prices.

The balance between buyers and sellers

P&F charts map out the relationship between supply (created by sellers) and demand
(created by buyers) at different price levels.
• When demand outstrips supply (more buyers than sellers), stock prices rise and this is
depicted by a column of Xs on the chart.
• Conversely, when supply outstrips demand, (more sellers than buyers) prices fall and
this is depicted by a column of Os on the chart.
The objective of a p&f chart is to identify the points at which established
supply/demand relationships change (these are known as .breakouts.). These changes
will very probably lead to a future significant move in the stock price.
 
 Features of Point and Figure Chart
•On a Point Figure Chart only significant price changes are recorded . For ex:- a
stock that has a price in the range of Rs 30 to Rs 50,price changes of one rupee or
more only may be posted.
• While the vertical scale on Point and Figure Chart represents the price of the
stock ,the horizontal scale does not represent the time scale in the usual sense.
•Each column on the horizontal scale of a Point and Figure Chart represents a
significant reversal of price movement and not on a trading day.

•Under a one-point scale (when there is change in price in one rupee) the Point
and Figure Chart for ABC stock is constructed as follows:---
•When the price of ABC stock rises by one rupee over the previously recorded
price , an X is recorded to reflect the increase.
•When the price of ABC stock falls by one rupee over the previously recorded
price, an O is recorded to reflect the decrease.
•When the direction of price change reverses (a decline after previous increases
or a rise after previous declines ), the price is recorded in the next column to the
right.
Chart Patterns
Support Levels
Support levels are price levels at which large numbers of buyers are
expected to enter the market . They are easily identified on Point and Figure
charts by 2 or more columns of O's bottoming out at the same level.
When penetrated, support levels often become resistance levels.
Resistance Levels
Resistance levels are prices at which large numbers of sellers are expected to
enter the market. You can identify them by 2 or more
columns of X's ending with equal tops.
 Trend Lines
Trend lines on point and figure charts are plotted at an angle of 45 degrees
(one square across and one up/down).

An up-trend will always be first penetrated by a column of O's and a

down-trend by a column of X's.
.

Breakouts
A breakout above a resistance level is a bullish signal.

Penetration of a support level is generally bearish.

The next pattern shows a strong support
base for the breakout - still a bullish sign
 POINT AND FIGURE CHART
CONSTRUCTION

59
57 X X

PRICE 55 X O X O

53 X O X O

51 O O X

49 O

47
45

MOVEMENT
SYMMETRICAL TRIANGLE
 Symmetrical Triangle
This pattern is made up of series of fluctuations, each fluctuation is smaller than
the previous one. Tops do not attain the height of the previous tops. Likewise
bottoms are higher then the previous one. Tops do not attain the height of
previous tops. Likewise the bottoms are higher then the previous ones .likewise
bottoms are higher then the previous bottoms .Connecting the lower tops that are
slanting downward form a symmetrical triangle. Connecting the rising bottom,
which is slanting upward, becomes the lower trend line. It is not easy to predict
the break away either way.

The symmetrical triangle does not have any bias towards the bull and bear
operators
It indicates the slow down in the direction of the original trend. A probability of
the original trend to continue after the completion of the triangle is always there .
Ascending Triangle

•Ascending Triangle is a Bullish

continuation Pattern.
•The assumption is that there is a
Up trend.

•The upper trend line is flat & lower

trend line is rising.

•This means the buyers are more

aggressive than seller. This is a
bullish Pattern & ultimately it results
in upward breakout & up trend
continues.
Descending
Triangle
•Descending Triangle is a
Bearish continuation
Pattern.
•The assumption is that
there is a down trend.
•The lower trend line is flat &
upper trend line is falling.
•This means the Sellers are
more aggressive than
Buyers. This is a Bearish
Pattern & ultimately it
results in Downside
breakout & Down Trend
continues.
Flag

•Flag pattern is
commonly seen on
the price charts.
•Flag results from bull
price fluctuation and
show the pattern
emerge either before
a fall or rise in the
value of assest.
There are two type of
flag
1) Up flag i.e bullish:-
In this the flag is
bear
formed by two
trend lines that
bend downwards.
Pennant

•Pennant looks like a

symmetrical triangle.

•Here also there are bullish

and bearish pennant.

•In the bullish pennant(up) Up pennant

the lower trend line connects
the rising bottom like in
ascending triangle.
•The bullish trend occur when
there is a upper trend line.

•In the bearish

pennant(down) the upper
trend line is falling and the
lower trend line is rising.
Down pennant
THANK YOU!