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.

Despite all the exotic tools it includes, technical analysis really just studies supply and
demand in a market in an attempt to determine what direction, or trend, will continue
in the future. It attempts to understand the emotions in the market by studying the
market itself, as opposed to its components. If you understand the benefits and
limitations of technical analysis, it can give you a new set of tools or skills that will
enable you to be a better trader or investor.

Technical analysis and fundamental analysis are the two main schools of thought in the
financial markets. Technical analysis looks at the price movement of a security and uses
this data to predict its future price movements. Fundamental analysis, on the other
hand, looks at economic data, known as fundamentals. Technical analysis can be used
on any security with historical trading data.

3.1.6.1 Three basic assumptions of technical analysis

The technical analysis is based on three assumptions –

• THE MARKET DISCOUNTS EVERYTHING,

• PRICE MOVES IN TRENDS,
• HISTORY TENDS TO REPEAT ITSELF.

The Market Discounts Everything

Technical analysis assumes that, at any given time, a stock’s price reflects everything
that has or could affect the company – including fundamental factors. Technical
analysis believes that the company’s fundamentals, along with broader economic
factors and market psychology, are all priced into the stock, removing the need to
actually consider these factors separately. This only leaves the analysis of price
movement, which technical theory views as a product of the supply and demand for a
particular stock in the market.
Price moves in trends

In technical analysis, price movements are believed to follow trends. This means that
after a trend has been established, the future price movement is more likely to be in the
same direction as the trend than to be against it. Most technical trading strategies are
based on this assumption.

History tends to repeat itself

Another important idea in technical analysis is that history tends to repeat itself, mainly
in terms of price movement. The repetitive nature of price movements is attributed to
market psychology. In other words, market participants tend to provide a consistent
reaction to similar market stimuli over time. Technical analysis uses chart patterns to
analyze market movements and understand trends. Although many of these charts
have been used for more than 100 years, they are still believed to be relevant because
they illustrate patterns in price movements that often repeat themselves.

A More Formal Definition Unfortunately, trends are not always easy to see. In other
words, defining a trend goes well beyond the obvious. In any given chart, you will
probably notice that prices do not tend to move in a straight line in any direction, but
rather in a series of highs and lows. In technical analysis, it is the movement of the highs
and lows that constitutes a trend. For example, an uptrend is classified as a series of
higher highs and higher lows, while a downtrend is one of lower lows and lower highs.
Figure 1 is an example of an uptrend. Point 2 in the chart is the first high, which is
determined after the price falls from this point. Point 3 is the low that is established as
the price falls from the high. For this to remain an uptrend, each successive low must
not fall below the previous lowest point or the trend is deemed a reversal. Types of
Trend There are three types of trend:

• Uptrend
• Downtrends
• Sideways/Horizontal Trends

As the names mean, whilst each successive peak and trough is better, it's referred to as
an upward fashion. If the peaks and troughs have become decrease, it's a downtrend.
When there may be little movement up or down within the peaks and troughs, it is a
sideways or horizontal fashion. If you need to get virtually technical, you would
possibly even say that a sideways trend is truely not a trend on its very own, but a lack
of a nicely-defined trend in either direction. In any case, the market can without a doubt
simplest fashion in those three ways: up, down or nowhere.

Trend Lengths Along with these three fashion instructions, there are three fashion
classifications. A trend of any route can be labeled as an extended-time period trend,
intermediate trend or a short-time period trend. In phrases of the inventory
marketplace, a first-rate trend is usually categorized as one lasting longer than a 12
months. An intermediate trend is considered to closing between one and three months
and a close to-term fashion is something much less than a month. A long-time period
fashion is composed of numerous intermediate trends, which frequently move against
the path of the main trend. If the predominant trend is upward and there may be a
downward correction in rate motion observed by using a continuation of the uptrend,
the correction is taken into consideration to be an intermediate trend. The short-time
period developments are additives of each principal and intermediate traits. Take a
glance a Figure 2 to get a sense of the way these 3 trend lengths might appearance.

When studying trends, it is essential that the chart is built to best mirror the type of
fashion being analyzed. To assist discover lengthy-time period tendencies, weekly
charts or every day charts spanning a 5-year period are utilized by chartists to get a
higher idea of the lengthy-time period fashion. Daily records charts are first-rate used
while studying both intermediate and brief-term traits. It is also crucial to remember
that the longer the trend, the extra important it's miles; for example, a one-month trend
is not as massive as a 5-12 months fashion.

DIFFERENCES BETWEEN TECHNICAL ANALYSIS AND FUNDAMENTAL

ANALYSIS

The key differences between technical analysis and fundamental analysis are as
follows:

1. Technical analysis mainly seeks to predict short term price movements, whereas
fundamental analysis tries to establish long term values.

2. The focus of technical analysis is mainly on internal market data, particularly price
and volume data. The focus of fundamental analysis is on fundamental factors relating
to the economy, the industry, and the firm.
3. Technical analysis appeals mostly to short
short-term
term traders, whereas fundamental
analysis appeals primarily to long
long-term investors.

TECHNICAL ANALYSIS TOOLS

Dow Theory
Originally proposed in the late nineteenth century by Charles H Dow, the editor of Wall
Street Journal, the Dow Theory is perhaps the oldest and best
best-known
known theory of technical
analysis. Dow developed this theory on the basis of certain hypothesis, which is as
follows:
a. No single individual or buyer or buyer can influence the major trends in the market.
However, an individual investor can affect the daily price movement by buying or
selling huge quantum of particul
particular scrip.

b. The market discounts everything. Even natural calamities such as earth quake,
plague and fire also get quickly discounted in the market. The world trade center blast
affected the share market for a short while and then the market returned back
bac to
Normalcy.

c. The theory is not infallible and it is not a tool to beat the market but provides a way to
understand the market.

Explanation of Theory:

An important part of Dow Theory is distinguishing the overall direction of the market.
To do this, the Theory uses trend analysis. 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.

Dow Theory identifies three trends within

the market: primary, secondary and minor. A
primary trend is the largest trend lasting for
more than 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.

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. Dow determined that a primary trend will
generally last between one and three years but could vary in some instances. Regardless
of trend length, the primary trend remains in effect until there is a
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 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.

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. Another important
characteristic of a secondary trend is that its moves are often more volatile than those of
the primary move.
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 g the
corrective moves within a secondary move, or those moves that go against the direction
of the secondary trend. Due to its short
short-term nature and the longer-term
term focus of Dow
Theory, the minor trend is not of major concern to Dow Theory followers.
follower But this
doesn't mean it is completely irrelevant; the minor trend is watched with the large
picture in mind, as these short
short-term
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
term volatility and lose sight of the b
bigger picture.

Market indicators
Market indicator is a series of data points derived from a formula, the formula for
market indicators is applied to the price data for multiple securities within the market,
instead of just one security. Price data can come from open, high, low or close points
for the securities, their volume, or both.

Bullish Percent Index (BPI)

The Bullish Percent Index (BPI) is a popular market breadth indicator
indicator. It is calculated
by dividing the number of stocks in a given group by the total number of stocks in that
group. Bullish Percent levels that are above 70% are considered overbought, whereas
levels below 30% are considered oversold. Strong buy signals occur when the Bullish
Percent Index falls below 30% and then reverses up b by
y at least 6%. Conversely,
promising sell signals occur when it goes above 70%, and then reverses down by at least
6%.
Arms Index (TRIN)
Richard Arms developed the TRIN, or Arms index, as a contrarians indicator to detect
overbought and oversold levels in the market. The TRIN is having an inverse
relationship with the market. Generally, a rising TRIN is bearish and a falling TRIN is
bullish. Sometimes the TRIN reflects the inverse relationship
Calculation
Arms Index (TRIN

Advancing issues/declining issues) / (advancing volume/declining volume)

A TRIN above 1 indicates that the volume in declining stocks outpaced the volume in
advancing stocks. In the final example the TRIN was below 1, indicating the volume in
advancing stocks was healthy and outpaced the volume in declining stocks.

The Volatility Index

The Volatility Index (VIX) is a contrarian sentiment indicator that helps to determine
when there is too much optimism or fear in the market. When sentiment reaches one
extreme or the other, the market typically reverses course.
Volatility attempts to measure such magnitude of price movements that a financial
instrument experiences over a certain period of time. The more dramatic the price
swings are in that instrument, the higher the level of volatility, and vice versa.

Volatility Index (or VIX) is a weighted measure of the implied volatility for 8 OEX put
and call options. The 8 puts and calls are weighted according to time remaining and the
degree to which they are in or out of the money. The result forms a composite
hypothetical option that is at-the-money and has 30 days to expiration. VIX represents
the implied volatility for this hypothetical at-the-money OEX option.
Calculation of VIX Index Values

VIX index values are calculated using the CBOE-traded standard SPX options (that
expire on the third Friday of each month) and using the weekly SPX options (that expire
on all other Fridays). Only those SPX options are considered whose expiry period lies
within 23 days and 37 days.

While the formula is mathematically complex, theoretically it works as follows. It

estimates the expected volatility of the S&P 500 index by aggregating the weighted
prices of multiple SPX puts and calls over a wide range of strike prices. All such
qualifying options should have valid non-zero bid and ask prices that represent the
market perception of which options' strike prices will be hit by the underlying during
the remaining time to expiry.

CHARTING - A TECHNICAL TOOL

A price chart is a sequence of prices plotted over a specific time frame. In statistical
terms, charts are referred to as time series plots. In technical analysis charts are used to
analyze the wide array of securities and forecast future price movements of it. Charts
provide an easy-to-read graphical representation of a security's price movement over a
specific period of time, A graphical historical record makes it easy to spot the effect of
key events on a security's price, its performance over a period of time and whether it's
trading near its highs, near its lows, or in between.

In the chart the share price movements of every day, which is plotted and connected
through a line. The Line charts are representing the intraday close prices only The Line
charts are not giving the information about open high and low prices & intraday swings
are ignored, Few investors and traders consider the closing level to be more important
than the open, high or low. For that kind of investors are benefited from the line charts.

Chart Types

Line Chart

The most basic of the four charts is the line chart

because it represents only the closing prices over
a set period of time. The line is formed by
connecting the closing prices over the time frame.
Line charts do not provide visual information of
the trading range for the individual points such as the high, low and opening prices.
However, the closing price is often considered to be the most important price in stock
data compared to the high and low for the day and this is why it is the only value used
in line charts.

Bar Charts

The bar chart expands on the line chart by adding

several more key pieces of information to each
data point. The chart is made up of a series of
vertical lines that represent each data point. This
vertical line represents the high and low for the
trading period, along with the closing price. The
close and open are represented on the vertical line
by a horizontal dash. The opening price on a bar
chart is illustrated by the dash that is located on
the left side of the vertical bar. Conversely, the
close is represented by the dash on the right. Generally, if the left dash (open) is lower
than the right dash (close) then the bar will be shaded black, representing an up period
for the stock, which means it has gained value. A bar that is colored red signals that the
stock has gone down in value over that period. When this is the case, the dash on the
right (close) is lower than the dash on the left (open).

Candlestick Charts

The candlestick chart is similar to a bar chart,

but it differs in the way that it is visually
constructed. Similar to the bar chart, the
candlestick also has a thin vertical line showing
the period's trading range. The difference comes
in the formation of a wide bar on the vertical
line, which illustrates the difference between the
open and close. And, like bar charts,
candlesticks also rely heavily on the use of
colors to explain what has happened during the
trading period. A major problem with the
candlestick color configuration, however, is that different sites use different standards;
therefore, it is important to understand the candlestick configuration used at the chart
site you are working with. There are two color constructs for days up and one for days
that the price falls. When the price of the stock is up and closes above the opening trade,
the candlestick will usually be white or clear. If the stock has traded down for the
period, then the candlestick will usually be red or black, depending on the site. If the
stock's price has closed above the previous day’s close but below the day's open, the
candlestick will be black or filled with the color that is used to indicate an up day

Point and Figure Charts

The point and figure chart is not well known

or used by the average investor but it has had
a long history of use dating back to the first
technical traders. This type of chart reflects
price movements and is not as concerned
about time and volume in the formulation of
the points. The point and figure chart
removes the noise, or insignificant price
movements, in the stock, which can distort
traders' views of the price trends. These types
of charts also try to neutralize the skewing effect that time has on chart analysis. When
first looking at a point and figure chart, you will notice a series of Xs and Os.

Concepts Underlying Chart Analysis

The basic concepts underlying chart analysis are: (a) persistence of trends; (b)
relationship between volume and trend; and (c) resistance and support levels.

Trends: The key belief of the chartists is that stock prices tend to move in fairly
persistent trends. Stock price behavior is characterized by inertia: the price movement
continues along a certain path (up, down or sideways) until it meets an opposing force,
arising out of an altered supply-demand relationship.

Relationship between volume and trends: Chartists believe that generally volume and
trend go hand in hand. When a major upturn begins the volume of trading increases as
the price advances and decreases as the price declines. In a major down turn, the
opposite happens; the volume of trading increases as the price declines and decreases as
the price rallies.
Support and Resistance levels: Chartists assume that it is difficult for the price of a
share to rise above a certain level called the resistance level and fall below a certain level
called a support level. Why? The explanation for the first claim goes as follows. If
investors find that prices fall after their purchases, they continue to hang on to their
shares in the hope of a recovery. And when the price rebounds to the level of their
purchase price, they tend to sell and heave sigh of relief as they break even.

Double Top (Reversal

The double top is a major reversal pattern that forms after an extended uptrend. The
pattern is made up of two consecutive peaks that are roughly equal, with a moderate
trough in-between. The classic double top shows the intermediate change, it ignores the
long-term change, the Double top chart always shows the trend from bullish to bearish.
Many potential double tops can form along the way up, but until key support is broken,
a reversal cannot be confirmed.

Double Bottom (Reversal)

The double bottom is a major reversal pattern that forms after an extended downtrend.
The Chart is made up of two consecutive troughs that are roughly equal, with a
moderate peak in-between. .The classic double bottom usually marks an intermediate or
long-term change in trend. Many potential double bottoms can form along the way
down, but until key resistance is broken, a reversal cannot be confirmed

Head and Shoulders Top (Reversal)

A Head and Shoulders reversal pattern forms after an uptrend, and its completion
marks a trend reversal. The pattern contains three successive peaks with the middle
peak (head) being the highest and the two outside peaks (shoulders) being low and
roughly equal. The reaction lows of each peak can be connected to form support, or a
neckline.
Head and Shoulders Bottom (Reversal)

The Head and Shoulders bottom is referred to sometimes as an Inverse Head and
Shoulders. The pattern shares many common characteristics with previous chart, but
relies more heavily on volume patterns for confirmation. Head and Shoulders Bottom
forms after a downtrend. The pattern contains three successive troughs with the middle
trough (head) being the deepest and the two outside troughs (shoulders) being
shallower. Ideally, the two shoulders would be equal in height and width. The reaction
highs in the middle of the pattern can be connected to form resistance, or a neckline

Triple Top (Reversal)

The triple top is a reversal pattern made up of three equal highs followed by a break
below support. In contrast to the triple bottom, triple tops usually form over a shorter
time frame and typically range from 3 to 6 months. Generally speaking, bottoms take
longer to form than tops. We will first examine the individual parts of the pattern and
then look at an example.
Rising Wedge (Reversal)

The rising wedge is a bearish pattern that begins wide at the bottom and contracts as
prices move higher and the trading range narrows. In contrast to symmetrical triangles,
which have no definitive slope and no bullish or bearish bias, rising wedges definitely
slope up and have a bearish bias. rising wedge as a reversal pattern, the pattern can also
fit into the continuation category. As a continuation pattern, the rising wedge will still
slope up, but the slope will be against the prevailing downtrend. As a reversal pattern,
the rising wedge will slope up and with the prevailing trend. Regardless of the type
(reversal or continuation), rising wedges are bearish.

Rounding Bottom (Reversal)

The rounding bottom is a long-term reversal pattern that is best suited for weekly
charts. It is also referred to as a saucer bottom, and represents a long consolidation
period that turns from a bearish bias to a bullish bias. A rounding bottom could be
thought of as a head and shoulders bottom without readily identifiable shoulders. The head
represents the low and is fairly central to the pattern. The volume patterns are similar
and confirmation comes with a resistance breakout. While symmetry is preferable on
the rounding bottom, the left and right side do not have to be equal in time or slope.
The important thing is to capture the essence of the pattern.
Triple Bottom (Reversal)

The triple bottom is a reversal pattern made up of three equal lows followed by a
breakout above resistance It is basically long-term nature, weekly charts can be best
suited for analysis

Bump and Run Reversal (Reversal)

Bump and Run Reversal (BARR) is a reversal pattern that forms after excessive
speculation drives prices up too far, too fast
Flag, Pennant (Continuation)

These patterns are usually preceded by a sharp advance or decline with heavy volume,
and mark a mid-point of the move

Indicators & Oscillators

There are two main types of indicators: leading and lagging. A leading indicator
precedes price movements, giving them a predictive quality, while a lagging indicator
is a confirmation tool because it follows price movement. A leading indicator is thought
to be the strongest during periods of sideways or non-trending trading ranges, while
the lagging indicators are still useful during trending periods. There are also two types
of indicator constructions: those that fall in a bounded range and those that do not. The
ones that are bound within a range are called oscillators - these are the most common
type of indicators. Oscillator indicators have a range, for example between zero and 100,
and signal periods where the security is overbought (near 100) or oversold (near zero).
Non-bounded indicators still form buy and sell signals along with displaying strength
or weakness, but they vary in the way they do this. The two main ways that indicators
are used to form buy and sell signals in technical analysis is through crossovers and
divergence. Crossovers are the most popular and are reflected when either the price
moves through the moving average, or when two different moving averages cross over
each other. The second way indicators are used is through divergence, which happens
when the direction of the price trend and the direction of the indicator trend are moving
in the opposite direction. This signals to indicator users that the direction of the price
trend is weakening. Indicators that are used in technical analysis provide an extremely
useful source of additional information. These indicators help identify momentum,
trends,
ends, volatility and various other aspects in a security to aid in the technical analysis
of trends. It is important to note that while some traders use a single indicator solely for
buy and sell signals, they are best used in conjunction with price movement,
moveme chart
patterns and other indicators. Accumulation/Distribution Line The accumulation
/distribution line is one of the more popular volume indicators that measures money
flows in a security. This indicator attempts to measure the ratio of buying to selling
sell by
comparing the price movement of a period to the volume of that period. Calculated: =
((Close - Low) - (High - Close)) / (High - Low) * Period's Volume.

The Relative Strength Index

The Relative Strength Index (RSI) is an extremely useful and popular momentum
oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of
its recent losses and turns that information into a number that ranges from 0 to 100. It
takes a single parameter, the number of time periods to use in the calculation. The RSI
has been broken down into its basic components which are the Average Gain,
Gain the
Average Loss, the First RS,, and the subsequent Smoothed RS's.
Stochastic Oscillator

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
tom of the range indicate distribution (selling pressure).
Rate of Change (ROC) and Momentum

Introduction and Calculation

The Rate of Change (ROC) momentum oscillator that measures the percent change in
price from one period to the next. The ROC calculation compares the current price with
the price n periods ago

ROC = ( (Today's close - Close n periods ago) / (Close n periods ago) ) * 100

The plot forms an oscillator that fluctuates above and below the zero line as the Rate of
Change moves from positive to negative. The oscillator can be used as any other
momentum oscillator by looking for higher lows, lower highs, positive and negative
divergences, and crosses above and below zero for signals The plot forms an oscillator
that fluctuates above and below the zero line as the Rate of Change moves from positive
to negative. The oscillator can be used as any other momentum oscillator by looking for
higher lows, lower highs, positive and negative divergences, and crosses above and
below zero for signals.

EFFICIENT MARKET THEORY

The efficient market hypothesis is a central idea of a modern finance that has profound
implications. An understanding of the efficient market hypothesis will help to ask the
right questions and save from a lot of confusion that dominates popular thinking in
finance. An efficient market is one in which the market price of a security is an unbiased
estimate of its intrinsic value. Note that market efficiency does not imply that the
market price equals intrinsic value at every point in time.
A corollary is that investors will also be less likely to discover great bargains and
thereby earn extraordinary high rates of return. The requirements for a securities
market to be efficient market are;
(1) Prices must be efficient so that new inventions and better products will cause a firms
securities prices to rise and motivate investors to supply capital to the firm (i.e., buy its
stock);
(2) Information must be discussed freely and quickly across the nations so all investors
can reactto new information;
(3) Transactions costs such as sales commissions on securities are ignored;
(4) Taxes are assumed to have no noticeable effect on investment policy;
(5) Every investor is allowed to borrow or lend at the same rate; and, finally,

(6) Investors must be rational and able to recognize efficient assets and that they will
want to invest money where it is needed most (i.e., in the assets with relatively high
returns).

Forms of Efficient Market Hypothesis

Eugene Fama suggested that it is useful to distinguish three levels of market efficiency.
They are
1) Weak-form efficiency - Prices reflect all information found in the record of past and
volumes;
2) Semi-strong form efficiency - Prices reflect not only all information found in the
record of past prices and volumes but also all other publicly available information;
3) Strongform efficiency - Prices reflect all available information, public as well as
private.

Weak form of EMH

The week form of market holds that present stock market prices reflect all known
information with respect to past stock prices, trends, and volumes. This form of theory
is just the opposite of the technical analysis because according to it, the sequence of
prices occurring historically does not have any value for predicting the future stocks
prices. The technical analysts rely completely on charts and past behavior of prices of
stocks.
Three types of tests have been commonly employed to empirically verify the weak-form
efficient market hypothesis: (a) serial correlation tests; (b) runs tests; and (c) filter rules
tests.

Semi-Strong Form of EMH

The semi strong form of the efficient market hypothesis centers on how rapidly and
efficiently market prices adjust to new publicly available information. In this state, the
market reflects even those forms of information which may be concerning the
announcement of a firm s most recent earnings forecast and adjustments which will
have taken place in the prices of security. The investor in the semi-strong form of the
market will find it impossible to earn a return on the portfolio which is based on the
publicly available information in excess of the return which may be said to be
commensurate with the portfolio risk. Many empirical studies have been made on the
semi-strong form of the efficient market hypothesis to study the reaction of security
prices to various types of information around the announcement time of the
information. Two studies commonly employed to test semi-strong form efficient market
are event study and portfolio study.

Strong-Form of EMH
The strong-form efficient market hypothesis holds that all available information, public
or private, is reflected in the stock prices. The strong form is concerned with whether or
not certain individuals or groups of individuals possess inside information which can
be used to make above average profits. If the strong form of the efficient capital market
hypothesis holds, then and day is as good as any other day to buy any stock. This the
most extreme form of the efficient market hypothesis. Most of the research work has
indicated that the efficient market hypothesis in the strongest form does not hold good.
Aroon Oscillator

An expansion of the Aroon is the Aroon oscillator, which simply plots the difference
between the Aroon up and down lines by subtracting the two lines. This line is then
plotted between a range of -100 and 100. The centerline at zero in the oscillator is
considered to be a major signal line determining the trend. The higher the value of the
oscillator from the centerline point, the more upward strength there is in the security;
the lower the oscillator's value is from the centerline, the more downward pressure. A
trend reversal is signaled when the oscillator crosses through the centerline. For
example, when the oscillator goes from positive to negative, a downward trend is
confirmed. Divergence is also used in the oscillator to predict trend reversals. A reversal
warning is formed when the oscillator and the price trend are moving in an opposite
direction. The Aroon lines and Aroon oscillators are fairly simple concepts to
understand but yield powerful information about trends. This is another great indicator
to add to any technical trader's arsenal.

Moving Averages

Moving averages are one of the most popular and easy to use tools available to the
technical analyst. The data series and make it easier to spot trends, the data are
especially helpful in reading volatile markets The two most popular types of moving
averages are the

Simple Moving Average (SMA) , Exponential Moving Average (EMA)

A simple moving average 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, But most moving averages
are created using the closing price

But In exponentially weighted moving averages, the weighting applied to the most
recent price depends on the specified period of the moving average the more weight
that will be applied to the most recent price The formula for an exponential moving
average is:

EMA(current) = ( (Price(current) - EMA(prev) ) x Multiplier) + EMA(prev)

EMA's Multiplier is calculated like this: (2 / (Time periods + 1)

Moving Average Convergence The moving average convergence divergence

(MACD) is one of the most well known and used indicators in technical analysis. This
indicator is comprised of two exponential moving averages, which help to measure
momentum in the security. The MACD is simply the difference between these two
moving averages plotted against a centerline. The centerline is the point at which the
two moving averages are equal. Along with the MACD and the centerline, an
exponential moving average of the MACD itself is plotted on the chart. The idea behind
this momentum indicator is to measure short-term momentum compared to longer
term momentum to help signal the current direction of momentum.

MACD= shorter term moving average - longer term moving average When the MACD
is positive, it signals that the shorter term moving average is above the longer term
moving average and suggests upward momentum. The opposite holds true when the
MACD is negative - this signals that the shorter term is below the longer and suggest
downward momentum. When the MACD line crosses over the centerline, it signals a
crossing in the moving averages. The most common moving average values used in the
calculation are the 26-day and 12-day exponential moving averages. The signal line is
commonly created by using a nine-day exponential moving average of the MACD
values. These values can be adjusted to meet the needs of the technician and the
security. For more volatile securities, shorter term averages are used while less volatile
securities should have longer averages. Another aspect to the MACD indicator that is
often found on charts is the MACD histogram. The histogram is plotted on the
centerline and represented by bars. Each bar is the difference between the MACD and
the signal line or, in most cases, the nine-day exponential moving average. The higher
the bars are in either direction, the more momentum behind the direction in which the
bars point.