PROJECT REPORT ON
“TECHNICAL ANALYSIS OF BANKING SECTOR AND
ANALYSING MARKETPERFORMER, OUTPERFORMER AND
UNDERPERFORMER”

SUBMITTED TO THE
UNIVERSITY OF MUMBAI

IN THE PARTIAL FULFILLMENT OF THE
REQUIREMENT FOR THE AWARD OF THE DEGREE
OF
MASTER OF MANAGEMENT STUDIES
SUBMITTED BY
MANISH BANSIDHAR INGALE

UNDER THE GUIDANCE OF
Mr. DEWANG MEHTA

SHAH AND ANCHOR KUTCHHI ENGINEERING COLLEGE
DEPARTMENT OF MANAGEMNT STUDIES
CHEMBUR, MUMBAI
BATCH 2012-2014

Declaration

I declare that the Master’s script that I hereby submit for the degree of Master of
Management Studies at the Department Of Management Studies, Shah and Anchor Kutchhi
Engineering College, has not previously been submitted by me for a degree at another university.

Manish Bansidhar Ingale
10th feb, 2014
Chembur

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ACKNOWLEDGEMENT

By the grace of God who has provided me with the skills and abilities to be able to complete this report and present a clear picture of what I have been doing during the course of my internship. I would firstly like to thank the Department of Capital Market, for making this learning experience a part of our education and specifically thank PROF.DEWANG MEHTA for his advice and assistance in helping us avail this opportunity. Lastly I would like to express my deepest and utmost thanks to my parents, who have made me whatever I am today.

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ABSTRACT
The field of equity research is very vast and one has to look into various aspects of the functioning of the company to get to any conclusion about the possible performance of the company in the market. Investors like warren buffet made a fortune out of investments in the stock market, which is quiet impossible without proper research about the companies. The field of equity research is full of challenges. It is your door to fame, fortune and, above all, professional challenge. In a world that is shrinking in size due to information technology and blurring boundaries between nations, the stock market (or the equities market), which is considered to be in its infant stage, is all set to grow in size.
The project on “Technical Analysis of Banking Sector and Analyzing Market Performer
Underperformer and Outperformer” was carried out by self study. This is limited learning and devoting time towards equity research but it also provided an insight on what various services such broking houses provide and what efforts are required to manage such organizations. The reason behind choosing this project is that it provides hands on experience with what goes on in the stock market on a day-to-day basis. Some value investors only look at present assets/earnings and don't place any value on future growth. Other value investors base strategies completely around the estimation of future growth and cash flows. Despite the different methodologies, it all comes back to trying to buy something for less than it is worth. The project initiated with understanding the mannerisms of the stock market trading followed by the dynamics of the banking sector. Some of the major players in banking sector were then chosen for further analysis. These companies were further studied in detail with respect to their financials and the management’s future plans regarding the functioning of the company, their expansion plans and various news about these companies and their global forays.

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TABLE OF CONTENTS

Sr.No.

Particulars

Page No.

Declaration

i

Acknowledgement

ii

Abstract

iii

1.

Introduction

1

2.

Technical Analysis

3

3

Price Styles (Charts Types)

10

4

Pattern Study

22

5

Major Indicators And Oscillators

41

6

Trading Strategies

55

7

Findings

66

8

Conclusions

70

9

Bibliography

71

1. INTRODUCTION
Professional investor will make more money & less loss than, who let their heart rule. Their head eliminate all emotions for decision making. Be ruthless & calculating, you are out to make money. Decision should be based on actual movement of share price measured both in money & percentage term & nothing else. Greed must be avoided
Patience may be a virtue, but impatience can frequently be profitable.
In Equity Analysis anticipated growth, calculations are based on considered FACTS
& not on HOPE. Equity analysis is basically a combination of two independent analyses, namely fundamental analysis & Technical analysis. The subject of Equity analysis, i.e. the attempt to determine future share price movement & its reliability by references to historical data is a vast one, covering many aspect from the calculating various
FINANCIAL RATIOS, plotting of CHARTS to extremely sophisticated indicators.
A general investor can apply the principles by using the simplest of tools: pocket calculator, pencil, ruler, chart paper & your cautious mind, watchful attention. It should be pointed out that, this equity analysis does not discuss how to buy & sell shares, but does discuss a method which enables the investor to arrive at buying & selling decision. The financial analysts always need yardsticks to evaluate the efficiency & performances of any business unit at the time of investment. Fundamental analysis is useful in long term investment decision.
It’s performances, liquidity, leverage, turnover, profitability & financial health was checked & analysis with the help of ratio analysis for the purpose of long term successful investment. Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements. Technical analysis mainly seeks to predict the short term price travels. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders.
It is the oldest approach to equity investment dating back to the late 19th century.

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Assumption’s for the Equity Analysis.
1. Works only in normal share-market conditions with great reliability, it also works in abnormal share-market conditions, but with low reliability.
2. Equity analysis is purely based on the INVESTMENT PHILOSOPHY, so the investment object has vital importance associated to return along with risk.
3. Cash management gets the magnitude role, because the scenario of equity analysis is revolving around the term money
4. Portfolio management, risk management was up to the investor s knowledge.
5. Capital market trend is always a friend, whether it is short run or long run.
6. You are buying stock & not companies, so don’t are curious or panic to do
Post-mortem of company’s performances
7. History repeats: investors & speculators react the same way to the same types of events homogeneously. 8. Capital market has a typical market psychology along with other issues like; perceptions, the crowd V/s the individual, traditions & trust.
9. An individual perceptions about the investment return & associated risk may differ from individual to individual.
10. Although the equity analysis is art as well as sciences so, it also has some Exceptions

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2. Technical Analysis
“Technical analysis refers to the study of market generated data like prices & volume to determine the future direction of prices movements.”
Technical analysis mainly seeks to predict the short term price travels. It is important criteria for selecting the company to invest. It also provides the base for decisionmaking in investment. The one of the most frequently used yardstick to check & analyze underlying price progress. For that matter a verity of tools was consider.
This Technical analysis is helpful to general investor in many ways. It provides important & vital information regarding the current price position of the company.
Technical analysis involves the use of various methods for charting, calculating & interpreting graph & chart to assess the performances & status of the price. It is the tool of financial analysis, which not only studies but also reflecting the numerical & graphical relationship between the important financial factors. The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating back to the late 19th century. It uses charts and computer programs to study the stock’s trading volume and price movements in the hope of identifying a trend.
In fact the decision made on the basis of technical analysis is done only after inferring a trend and judging the future movement of the stock on the basis of the trend.
Technical Analysis assumes that the market is efficient and the price has already taken into consideration the other factors related to the company and the industry. It is because of this assumption that many think technical analysis is a tool, which is effective for short-term investing. 3|Page

DOW THEORY
Charles Dow who was editor of Wall Street Journal in 1900 is known for the most important theory developed by him with technical indicators. In fact, the theory gained so much significance that the theory was named after him.
The Dow Theory has been further developed by other technical analysts and it forms the basis of the technician’s theory. The theory predicts trends in the market for individual and total existing securities. It also shows reversals in stock prices.
According to ‘Dow theory’, the market always has three movements and the movements are simultaneous in the nature.
These movements may be described as:•

The narrow movement which occurs from day to day.

•

The short swing which usually moves for short time like two weeks and extends up to a month; this movement can be called a short term movement.

•

The third movement is also the main movement and it covers for years in its duration. According to the type of movements, they have been given special names.
•

The narrow movement is called ‘fluctuations’

•

The short swing is better known as ‘secondary movements’

•

The main movement is also called the ‘primary trends’

•

Secondary movements are those which last only for a short while and they are also known as “corrections”.

•

Primary trends are the main movement in the stock market. It is also called ‘Bears” and ‘Bulls” market.

According to the Dow Theory, the price movements in a market can be identified by means of a line-chart. In this chart the technical analyst should plot the price of the share. With it, he should also mark the market average every day. This would help in identifying the primary and secondary movements. Dow theorists believe in ‘momentum’, which

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according to them keeps the price moving in the same direction. They believe in primary trends, which according to them are momentum or bear and bull markets. The momentum will carry the prices further but momentum of primary trend will be halted by the terminology used by technical analysts called ‘support areas’ and ‘resistance areas’.

Criticism of Dow Theory
Dow has developed this theory to depict the general trend of the market but not with the intention of projecting the future trend or to diagnose the buy and sell signals in the market. These applications of the Dow Theory have come in the light of analytical studies of financial analysts. This theory is criticized on the ground that it is too subjective and based on historical interpretation; it is not infallible as it depends on the interpretative ability of the analyst. The results of this theory do not also give meaningful and conclusive evidence of any action to be taken in terms of buy and sell operations.

Basic premises of technical analysis:
•

Market prices are determined by the interaction of supply & demand forces.

•

Supply & demand are influenced by variety of supply & demand affiliated

•

Factors both rational & irrational

•

These include fundamental factors as well as psychological factors.

•

Barring minor deviations stock prices tend to move in fairly persistent trends.

•

Shifts in demand & supply bring about change in trends.

•

This shift s can be detected with the help of charts of manual & computerized action, because of the persistence of trends & patterns analysis of past market data can be used to predict future prices behaviours.

Drawbacks of technical analysis:
•

Technical analysis does not able to explain the rezones behind the employment or selection of specific tool of Technical analysis.

•

The technical analysis failed to signal an uptrend or downtrend in time.
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Steps in Technical Analysis
Technical analysis evolved from the stock market theories of Charles Henry Dow, founder of the Wall Street Journal and co-founder of Dow Jones and Company. The goal of technical analysis is to predict the future price of stocks, commodities, futures and other tradable securities based on past prices and performance of those securities. Technical analysts apply the law of supply and demand to understand how the stock market and other securities exchanges work, identifying trends and profiting from them. The following steps will help you understand technical analysis and how it is applied to choosing stocks and other commodities.
Step 1 Understand Dow's theories behind technical analysis
Three of Dow's theories about investments form the underpinnings for technical analysis and how technical analysts analyze financial markets. Those theories are described below, along with how technical analysts interpret them. o Market fluctuations discount everything else. o Price movements can often be charted and predicted. o History repeats itself
Step 2 Look for quick results
Unlike fundamental analysis, which looks at balance sheets and other financial data over periods of several years, technical analysis focuses on periods no longer than a month and sometimes as short as a few minutes. It is suited to people who seek to make money from securities by buying and selling them rather than those who invest for the long term.
Step 3 Read charts to spot price trends
Technical analysts look at charts and graphs of securities prices to spot the general direction in which prices are headed, overlooking individual up and down fluctuations.
Trends are classified by type and duration.

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The 3 trend types are o uptrend, in which individual high and low prices are higher than previous highs and lows; o downtrends, in which individual high and low prices are lower than previous highs and lows; o Horizontal trends, in which individual highs and lows don't change significantly from previous highs and lows.

Technical analysts use 4 different kinds of charts. They use line charts to plot closing stock prices over a period of time, bar and candlestick charts to show the high and low prices for the trading period (and gaps between trading periods if there are any), and point and figure charts to show significant price movements over a period of time.
Step 4 Understand the concepts of support and resistance.
Support refers to the lowest price a security reaches before more buyers come in and drive the price up through purchasing it. Resistance refers to the highest price a security reaches before owners sell their shares and cause the price to fall again. These levels are not fixed, but fluctuate. On a chart depicting channel lines, the bottom line is the support line
(floor price for the security), while the top line is the resistance line (ceiling price). Support and resistance levels are used to confirm the existence of a trend and to identify when the trend reverses itself.
Because people tend to think in round numbers (10, 20, 25, 50, and 100, 500, 1,000, and so on), support and resistance prices are often round numbers.
It is possible for stock prices to rise above resistance levels or fall below support levels. In such cases, the resistance level may become a support level for a new, higher resistance level; or the support level may become a resistance level for a new, lower support level. For this to happen, the price has to make a strong, sustained change; however, such reversals are common in the short term.

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Step 5 Pay attentions to the volume of trading.
How much buying and selling goes on indicates the validity of a trend or whether it's reversing itself. If the trading volume increases substantially when the price rises substantially, the trend is probably valid. If the trading volume increases only slightly when the price goes up, or goes down instead, the trend is probably due to reverse itself.
Step 6 Use moving averages to smooth out minor price fluctuations.
A moving average is the average price for a fixed period of time, such as the last 10 days. Moving averages remove individual ups and downs, making it easier to see the direction of the overall trend. Plotting prices against moving averages, or short-term averages against long-term averages, makes it easier to spot trend reversals, which are likely to occur and times where the 2 lines cross. There are several averaging methods used.
The simple moving average (SMA) is taken by just adding the closing prices taken during the time period and dividing by the number of prices. The longer the time period, and therefore the larger the number of prices used, the fewer fluctuations that appear in the chart of averages.
An exponential moving average (EMA) is similar to the linear moving average, except that it weighs only the most recent prices used in computing the average, making it more responsive to the latest information than a simple moving average.
Step 7 Use indicators and oscillators to support what the price movements are telling you.
Indicators are calculations that support the trend information gleaned from price movements and add another factor into your decision on whether to buy or sell securities.
Some indicators can have any value, while others are restricted to a particular range of values, such as 0 to 100; these indicators are termed oscillators.
Indicators may be either leading or lagging. Leading indicators predict price movements and are most useful during horizontal trends to signal uptrend’s or downtrends,

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while lagging indicators confirm price movements and are most useful during uptrend and downtrends. Trend indicators include the average directional index (ADX) and the Aroon indicator. The ADX uses positive and negative directional indicators to determine how strong an uptrend or downtrend is on a scale of 0 to 100, with values below 20 meaning a weak trend and over 40 a strong one. The Aroon indicator plots the lengths of time since the highest and lowest trading prices were reached, using that data to determine the nature and strength of the trend, as well as when a new trend has begun.

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3. Price Styles (Charts Types)
Price in a chart can be displayed in four styles:
1. Bar Chart.
2. Line Chart.
3. Candlestick Chart.
4. Point and Figure Charts

1) Bar Charts :

The highs and lows of a foreign currency are plotted in a diagram and the points are joined with vertical lines (bars). A small horizontal tick to the left denotes the opening level while a small horizontal tick to the right represents the closing price of each interval.

2) Line Chart.
It gives the detailed information about every aspect. The exchange rates for each time period are plotted in a diagram and the points are joined. Prices on the y-axis, time on the xaxis. The line chart chooses for example the closing price of consecutive time periods, but can also work with daily, official fixings.

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The relatively easy handling of line charts is a great advantage. Line charts do not show price movements within a time period. This can be a problem because important information for exchange rate analysis can be lost. This Problem was remedied with the development of bar charts that represent a more sophisticated form of line chart.

3) Candlestick Chart.
A candlestick is black if the closing price is lower than the opening price. A candlestick is white if the closing price is higher than the opening price.

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In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice contracts. This technique is called candlestick charting. Steven Nison is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation. Candlestick charts display the open, high, low, and closing prices in a format similar to a modern-day bar chart, but in a manner that extenuates the relationship between the opening and closing prices. Candlestick Charts are simply a new way of looking at prices, they don't involve any calculations. Because candlesticks display the relationship between the open, high, low, and closing prices, they cannot be displayed on securities that only have closing prices, nor were they intended to be displayed on securities that lack opening prices.
The interpretation of candlestick charts is based primarily on patterns. The most popular patterns are explained below.

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Bullish Patterns
1. Long white (empty) line. This is a bullish line. It occurs when prices open near the low and close significantly higher near the period's high.

2. Hammer. This is a bullish line if it occurs after a significant downtrend. If the line occurs after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real body and a long lower shadow the body can be empty or filled-in. 3. Piercing line. This is a bullish pattern and the opposite of a dark cloud cover. The first line is a long black line and the second line is a long white line. The second line opens lower than the first line's low, but it closes more than halfway above the first line's real body.

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1) Bullish engulfing lines. This pattern is strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is engulfed by a large bullish (empty) line.

2) Morning star. This is a bullish pattern signifying a potential bottom. The "star" indicates a possible reversal and the bullish line confirms this. The star can be empty or filled-in.

3) Bullish doji star. A "star" indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation before trading a doji star. The first line can be empty or filled in.

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Bearish Patterns
1) Long black (filled-in) line. This is a bearish line. It occurs when prices open near the high and close significantly lower near the period's low.

2) Hanging Man. These lines are bearish if they occur after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies and a long lower shadow the bodies can be empty or filled-in. 3) Dark cloud cover. This is a bearish pattern. The pattern is more significant if the second line's body is below the centre of the previous line's body (as illustrated).

4) Bearish engulfing lines. This pattern is strongly bearish if it occurs after a significant uptrend (i.e., it acts as a reversal pattern). It occurs when a small bullish
(empty) line is engulfed by a large bearish (filled-in) line.

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5) Evening star. This is a bearish pattern signifying a potential top. The "star" indicates a possible reversal and the bearish (filled-in) line confirms this. The star can be empty or filled in.

6) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star.

7) Shooting star. This pattern suggests a minor reversal when it appears after a rally.
The star's body must appear near the low price and the line should have a long upper shadow. 16 | P a g e

Reversal Patterns
1) Long-legged doji. This line often signifies a turning point. It occurs when the open and close are the same, and the range between the high and low is relatively large.

2) Dragon-fly doji. This line also signifies a turning point. It occur when the open and close are the same, and the low is significantly lower than the open, high, and closing prices. 3) Gravestone doji. This line also signifies a turning point. It occurs when the open, close, and low are the same, and the high is significantly higher than the open, low, and closing prices.

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4) Star. Stars indicate reversals. A star is a line with a small real body that occurs after a line with a much larger real body, where the real bodies do not overlap. The shadows may overlap.

5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation before trading a doji star.

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Neutral Patterns
1) Spinning tops. These are neutral lines. They occur when the distance between the high and low, and the distance between the open and close, are relatively small. 2) Doji. This line implies indecision. The security opened and closed at the same price. These lines can appear in several different patterns. Double doji lines (two adjacent doji lines) imply that a forceful move will follow a breakout from the current indecision.

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4) 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. The Xs represent upward price trends and the Os represent downward price trends. There are also numbers and letters in the chart; these represent months, and give investors an idea of the date. Each box on the chart represents the price scale, which adjusts depending on the price of the stock: the higher the stock's price the more each box represents. On most charts where the price is between $20 and $100, a box represents $1, or 1 point for the stock. The other

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critical point of a point and figure chart is the reversal criteria. This is usually set at three but it can also be set according to the chartist's discretion. The reversal criteria set how much the price has to move away from the high or low in the price trend to create a new trend or, in other words, how much the price has to move in order for a column of Xs to become a column of Os, or vice versa. When the price trend has moved from one trend to another, it shifts to the right, signalling a trend change.

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4. Pattern Study
Support

A support is a horizontal line where interest in buying a commodity is strong enough to overcome the pressure to sell. Support level is the price level at which sufficient demand exists to, at least temporarily, halt a downward movement in prices. Logically as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support. Support does not always hold true and a break below support signals that the bulls have lost over the bears. A fall below support level indicates more willingness to sell and a lack of willingness to buy. A break in the levels of support indicates that the expectations of sellers are reducing and they are ready to sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low.
Once support is broken, another support level will have to be established at a lower level

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Resistance
A resistance is a horizontal ceiling where the pressure to sell is greater than the pressure to buy. Thus a Resistance level is a price at which sufficient supply exists to; at least temporarily, halt an upward movement. Logically as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

Resistance does not always hold true and a break above resistance signals that the bears have lost over the bulls. A break in the resistance level shows more willingness to buy or lack of incentive to sell. Resistance breaks and new highs indicate that buyer’s expectations have increased and are ready to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.

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Head and Shoulders

The head and shoulders pattern can be either head or shoulders, top or head and shoulders bottom. The Charts are a picture of a head and shoulders movement, which portrays three successive rallies and reactions with the second one making the highest/lowest point.

Head and Shoulders (Top reversal)
A Head and Shoulders (Top) is a reversal pattern which occurs following an extended uptrend forms 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 As its name implies, the head and shoulders reversal pattern is made up of a left shoulder, head, right shoulder, and neckline. Other parts playing a role

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in the pattern are volume, the breakout, price target and support turned resistance. Let’s look at each part individually, and then put them together with some example

1. Prior trend: It is important to establish the existence of a prior uptrend for this to be a reversal pattern. Without a prior uptrend to reverse, there cannot be a head and shoulders reversal pattern, or any reversal pattern for that matter.

2. Left shoulder: While in an uptrend, the left shoulder forms a peak that marks the high point of the current trend. It is formed usually at the end of an extensive advance during which volume is quite heavy. At the end of the left shoulder there is usually a dip or recession which typically occurs on low volume.

3. Head: From the low of the left shoulder, an advance begins that exceeds the previous high and marks the top of the head. At this point, in order conform to proper form, prices must come down somewhere near the low of the left shoulder –somewhat lower perhaps or somewhat higher but in any case, below the top of the left shoulder.

4. Right shoulder: The right shoulder is formed when the low of the head advances again.
The peak of the right shoulder is almost equal in height to that of the left shoulder but lower than the head. While symmetry is preferred, sometimes the shoulders can be out of whack.
The decline from the peak of the right shoulder should break the neckline.

5. Neckline: A neckline can be drawn across the bottoms of the left shoulder, the head and the right shoulder. A breaking of this neckline on a decline from the right shoulder is the conformation and completes the head and shoulder formation.

6. Volume: As the head and shoulders pattern unfolds, volume plays an important role in
Signal. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing volume levels. Ideally, but not always, volume during the advance of the left shoulder should be higher than during the advance of the head. These decreases in volume

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along with new highs that form the head serve as a warning sign. The next warning sign comes when volume increases on the decline from the peak of the head. Final conformation comes when volume further increases during the decline of the right shoulder.

7. Neckline break: The head and shoulders pattern is said to be complete only when the neckline support is broken. Ideally, this should also occur in a convincing manner with an expansion in volume.
8. Support turned resistance: Once support is broken, it is common for this same support level to turn into resistance. Sometimes, but certainly not always, the price will return to the support break, and offer a second chance to sell.

9. Price target: After breaking neckline support, the projected price decline is found by measuring the distance from the neckline to the top of the head. Price target is calculated by subtracting the above distance from the neckline. Any price target should serve as a rough guide, and other factors such as previous support levels should be considered as well.
Signals generated by head and shoulder pattern

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1. The support line is based on points B and C.
2. The resistance line. After giving in at point D, the market may retest the neckline at point E.
3. The price direction. If the neckline holds the buying pressure at point E, then the formation provides information regarding the price direction: diametrically opposed to the direction of the head-and-shoulders (bearish).
4. The price target D to F. This is provided by the conformation of the formation (by breaking through the neckline under heavy trading volume). This is equal to the range from top of the head to neckline.

Inverted head and shoulders
The head and shoulders bottom is the inverse of the H&S Top. In the chart below, after a period, the downward trend reaches a climax, which is followed by a rally that tends to carry the share back approximately to the neckline. After a decline below the previous low followed by a rally, the head is formed. This is followed by the third decline which fails to reach the previous low. The advance from this point continues across the neckline and constitutes the break through.

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The main difference between this and the Head and Shoulders Top is in the volume pattern associated with the share price movements. The volume should increase with the increase in the price from the bottom of the head and then it should start increasing even more on the rally which is followed by the right shoulder. If the neckline is broken but volume is low, you should be sceptical about the validity of the formation. As a major reversal pattern, the head and shoulders bottom forms after a downtrend, and its completion marks a change in trend. The pattern contains three troughs in successive manner with the two outside troughs namely the right and the shoulder being lower in height than the middle trough (head) which is the deepest. Ideally, the two shoulders i.e. the right and the left shoulder should be equal in height and width. The reaction highs in the middle of the pattern can be connected to form resistance, or a neckline.

Head and shoulders bottom
The price action remains roughly the same for both the head and shoulders top and bottom, but in a reversed manner. The biggest difference between the two is played by the volume. While an increase in volume on the neckline breakout for a head and shoulders top is welcomed, it is absolutely required for a bottom. Let’s look at each part of the pattern individually, keeping volume in mind:
1. Prior trend: For this to be a reversal pattern it is important to establish the existence of a prior downtrend for this to be a reversal pattern. There cannot be a head and shoulders bottom formation, without a prior downtrend to reverse.

2. Left shoulder: It is formed after an extensive increase in price, usually supported by high volume. While in a downtrend, the left shoulder forms a trough that marks a new reaction low in the current trend. After forming this trough, an advance ensues to complete the formation of the left shoulder. The high of the decline usually remains below any longer trend line, thus keeping the downtrend intact.

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3. Head: After the formation of the left shoulder, a decline begins that exceeds the previous low and forms a point at an even lower point. After making a bottom, the high of the subsequent advance forms the second point of the neckline.

4. Right shoulder: Right shoulder is formed when the high of the head begins to decline.
The height of the right shoulder is always less than the head and is usually in line with the left shoulder, though it can be narrower or wider. When the advance from the low of the right shoulder breaks the neckline, the head and shoulders reversal is complete.

5. Neckline: The neckline is drawn through the highest points of the two intervening troughs and may slope upward or downward. The neckline forms by connecting two reaction highs. First reaction marks the end of the left shoulder and the beginning of the head. The second reaction marks the end of the head and the beginning of the right shoulder. Depending on the relationship between the two reaction highs, the neckline can slope up, slope down, or be horizontal. The slope of the neckline will affect the pattern’s degree of bullishness: an upward slope is more bullish than downward slope.

6. Volume: Volume plays a very important role in head and shoulders bottom. Without the proper expansion of volume, the validity of any breakout becomes suspect. Volume can be measured as an indicator (OBV, Chaikin Money Flow) or simply by analyzing the absolute levels associated with each peak and trough. Volume levels during the second half of the pattern are more important than the First half. The decline of the volume of the left shoulder is usually heavy and selling pressure is also very intense. The selling continues to be intense even during the decline that forms the low of the head. After this low, subsequent volume patterns should be watched carefully to look for expansion during the advances. The advance from the low of the head should be accompanied by an increase in volume and/or better indicator readings (e.g. CMF > 0 or strength in OBV). After the formation the second neckline point by the reaction high, there should be a decline in the right shoulder accompanied with light volume. It is normal to experience the Profit making after an advance. Volume analysis helps distinguish between normal profit making and

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heavy selling pressure. With light volume on the pullback, indicators like CMF and OBV should remain strong. The most important moment for volume occurs on the advance from the low of the right shoulder. For a breakout to be considered valid there needs to be an expansion of volume on the advance and during the breakout.

7. Neckline break: The head and shoulders pattern is said to be complete only when neckline resistance is broken. For a head and shoulders bottom, this must occur in a convincing manner with an expansion of volume.

8. Resistance turned support: The same resistance level can turn into support, if the resistance is broken. Price will return to the resistance break and provide a second chance to buy. 9. Price target: Once the neckline resistance is broken, the projected advance is calculated by measuring the distance from the neckline to the bottom of the head. This distance is then added to the neckline to reach a price target. Any price target should serve as a rough guide and other factors should be considered as well. These factors might include previous resistance levels, Fibonacci retracements or long-term moving averages.

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Double tops and bottoms

These are considered to be among the most familiar of all chart patterns and often signal turning points, or reversals. The double top resembles the letter “M”. Conversely, the double bottom resembles a “W” formation; in reverse of the double top.

Double top
It is a term used in technical analysis to describe the rise of a stock, a drop and another rise roughly of the same level as the previous top and finally followed by another drop. A double top is a reversal pattern which occurs following an extended uptrend. This name is given to the pair of peaks which is formed when price is unable to reach a new high. It is desirable to sell when the price breaks below the reaction low that is formed between the two peaks.

Context: The double top must be followed by an extended price rise or uptrend. The two peaks formed need not be equal in price, but should be same in the area with a minor

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reaction low between them. This is a reliable indicator of a potential reversal to the downside. Appearance: Price moves higher and forms a new high. This is followed by a downside retracement, which forms a reaction low before one low-volume assault is made on the area of the recent high. In some cases the previous high is never reached, and sometimes it does not hold. This pattern is said to be complete once price makes the second peak and then penetrates the lowest point between the highs, called the reaction low. The sell indication from this topping pattern occurs when price breaks the reaction low to the downside.
Breakout expectation: When the reaction low is penetrated to the downside, accompanied by expanding volume the double top pattern becomes official. Downside price target is calculated by subtracting the distance from the reaction low to the peak from the reaction low. Often times a double top will mark a lasting top and lead to a decline which exceeds the price target to the downside. Although there can be variations but if the trend is from bullish to bearish, the classic double top will mark at least an intermediate change, if not long-term change. Many potential double tops can form along the way up, but until key support is broken, a reversal cannot be confirmed.
Let’s look at the key points in the formation.

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1. Prior trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the double top, a uptrend of several months should be in place.

2. First peak: The first peak marks the highest point of the current trend.

3. Trough: Once the first peak is reached, a decline takes place that typically ranges from
10-20%. The lows are sometimes rounded or drawn out a bit, which can be a sign of tepid demand. 4. Second peak: The advance off the lows usually occurs with low volume and meets resistance from the previous high. Resistance from the previous high should be expected and after the resistance is met, only the possibility of a double top exists. The pattern still needs to be confirmed. The time period between peaks can vary from a few weeks to many months, with the norm being 1-3 months. While exact peaks are preferable, there is some leeway. Usually a peak within 3% of the previous high is adequate.

5. Decline from peak: Decline in the second peak is witnessed by an expanding volume and/or an accelerated descent, perhaps marked with a gap or two. Such a decline shows that the forces of supply are stronger than the forces of demand and a support test is imminent.

6. Support break: The double top and trend reversal are not complete even when the trading till the support is done. The double top pattern is said to be complete when the support breaks from the lowest point between the peaks. This too should occur with an increase in volume and/or an accelerated descent.

7. Support turned resistance: Broken support becomes potential resistance and there is sometimes a test of this newfound resistance level with a reaction rally

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8. Price target: Price target is calculated by subtracting the distance from the support break to peak from the support break. The larger the potential decline the bigger will be the formation. Double bottom
Double bottom is a charting technique used in technical analysis. It is used to describe a drop in the value of a stock (index), bounces back and then another drop to the similar level as the previous low and rebounds again. A double bottom is a reversal pattern which occurs following an extended downtrend. The buy signal is when price breaks above the reaction high which is formed between the two lows.

Context: The double bottom must be followed by an extended decline in prices. The two lows formed have to be equal in areas with a minor reaction high between them, though they need not to be equal in price. This is a reliable indicator of a potential reversal to the upside. Appearance: Price reduces further to form a new low. This is followed by upside retracement or minor bounce, which forms a reaction high before one low-volume downward push is made to the area of the recent low. In some cases the previous low is never reached, while in others it is penetrated to the downside, but price does not remain below it. This pattern is considered complete once price makes the second low and then

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penetrates the highest point between the lows, called the reaction high. The buy indication from this bottom pattern occurs when price breaks the reaction high to the upside. Breakout expectation: A double bottom pattern becomes official when the reaction high is entreated to the upside, ideally accompanied by expanding volume. Upside price target is calculated adding the distance from the reaction high to the low to that of reaction high. Often times a double bottom will mark a lasting low and lead to a price advance which exceeds the price target to the upside. There can be many variations that can occur in the double bottom, but the classic double bottom usually marks an intermediate or a long-term change in trend.
Many potential double bottoms can be formed along the way down, but a reversal cannot be confirmed until key resistance is broken.
The key points in the formation are as follows:

1. Prior trend: With any reversal pattern, there must be an existing trend to reverse. In the case of the double bottom, an important downtrend of several months should be in place.

2. First trough: It marks the lowest point of the current trend. Though it is fairly normal
In appearance and the downtrend remains in place.

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3. Peak: After the first trough is reached, an advance ranging from 10-20% usually takes place. An increase in the volume from the first trough signals an early accumulation. The peaks high is sometimes rounded or drawn out a bit because of the hesitation in going back.
This hesitation is an indication of an increase in demand, but this increase is not strong enough for a breakout.

4. Second trough: The decline off the reaction high usually occurs with low volume and meets support from the previous low. Support from the previous low should be expected.
Even after establishing support, only the possibility of a double bottom exists, it still needs to be confirmed. The time period between troughs can vary from a few weeks to many months, with the norm being 1-3 months. While exact troughs are preferable, there is some room to maneuver and usually a trough within 3% of the previous is considered valid.

5. Advance from trough: Volume gains more importance in the double bottom than in the double top. The advance of the second trough should be clearly evidenced by the increasing volume and buying pressure. An accelerated ascent, perhaps marked with a gap or two, also indicates a potential change in sentiment.
6. Resistance break: The double top and trend reversal are considered incomplete, even after they trade up to resistance. Breaking resistance from the highest point between the troughs completes the double bottom. This too should occur with an increase in volume and/or an accelerated ascent.

7. Resistance turned support: Broken resistance becomes potential support and there is sometimes a test of this newfound support level with the first correction. Such a test can offer second chance to close a short position or initiate a long.

8. Price target: Target is estimated by adding the distance from the resistance breakout to trough lows on top of the resistance break. This would imply that the bigger the formation is, the larger the potential advance.

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Rounded top and bottom

Another shape which a top and bottom can take is one in which the reversal is “rounded”.
The rounded bottom formation forms when the market gradually yet steadily shifts from a bearish to bullish outlook while in the case of a rounded top, from bullish to bearish. The
Rounded Top formation consists of a gradual change in trend from up to down. The
Rounded Bottom formation consists of a gradual change in trend from down to up. This formation is the exact opposite of a Rounded Top Formation. The prices take on a bowl shaped pattern as the market slowly and casually changes from an upward to a downward trend It is very (remove) considered very difficult to separate a rounded bottom, where the price continues to decrease from a consolidation pattern and where price stays at a level, but the clue, as always, is in volume. In a true Rounded Bottom, the volume decreases as the price decreases, this signals a decrease in the selling pressure. A very little trading activity can be seen when the price movement becomes neutral and goes sideways and the volumes are also low. Then, as prices start to increase, the volume increases.

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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. Lots of things can cause this, such as an earnings report coming out after the stock market had closed for the day. If the earnings were significantly higher than expected, this could result in the price opening higher than the previous day’s close. If the trading that day continues to trade above that point, a gap will exist in the price chart. Gaps can offer evidence that something important has happened tithe fundamentals or the psychology of the crowd that accompanies this market movement. Gaps appear more frequently on daily charts, where every day is an opportunity to create an opening gap.
Gaps can be subdivided into four basic categories:

•

Common gap

•

Breakaway gap

•

Runaway/ Continuation gap

•

Exhaustion gap

Common gaps
Sometimes referred to as a trading gap or an area gap, the common gap is usually uneventful. This gap occurs characteristically in nervous markets and is generally closed within few days. In fact, they can be caused by a stock going ex-dividend when the trading volume is low. Getting closed means that the price action at a later time usually retraces to at the least the last day before the gap. This is also known as filling the gap. A common gap usually appears in a trading range or congestion area and reinforces the apparent lack of interest in the stock at that time. Many times this is further exacerbated bylaw trading volume. Being aware of these types of gaps is good, but doubtful that they will produce trading opportunities.

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Breakaway gaps
Breakaway gaps are the exciting ones. They occur when the price action is breaking out of their trading range or congestion area. To understand gaps, one has to understand the nature of congestion areas in the market. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. The area near the top of the congestion area is usually resistance when approached from below. Likewise, the area near the bottom of the congestion area is support when approached from above. To break out of these areas requires market enthusiasm and either many more buyers than sellers for upside breakouts or more sellers than buyers for downside breakouts. Volume will (should) pick up significantly, for not only the increased enthusiasm, but many are holding positions on the wrong side of the breakout and need to cover or sell them. It is better if the volume does not happen until the gap occurs. This means that the new change in market direction has a chance of continuing. The point of breakout now becomes the new support (if an upside breakout) or resistance (if a downside breakout). Don’t fall into the trap of thinking this type of gap, if associated with good volume, will be filled soon. It might take a long time. Go with the fact that a new trend in the direction of the stock has taken place and trade accordingly. A good confirmation for trading gaps is if they are associated with classic chart patterns.

Runaway gaps
Runaway gaps are also called measuring gaps and are best described as gaps that are caused by increased interest in the stock. For runaway gaps to the upside, it usually represents traders who did not get in during the initial move of the uptrend and while waiting for retracement in price, decided it was not going to happen. Increased buying interest happens all of a sudden and the price gaps above the previous day’s close. This type of runaway gap represents an almost panic state in traders. Also, a good uptrend can have runaway gaps caused by significant news events that cause new interest in the stock. Runaway gaps can also happen in down trends. This usually represents increased liquidation of that stock by traders and buyers who are standing on the sidelines. These can become very serious as those who are holding onto the stock will eventually panic and sell, but sell to whom? The

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price has to continue to drop and gap down to find buyers. Not a good situation. The futures market at times will have runaway gaps that are caused by trading limits imposed by the exchanges. Getting caught on the wrong side of the trend when you have these limit moves in futures can be horrifying. The good news is that you can also be on the right side of them. These are not common occurrences in the futures market despite all the wrong information being touted by those who do not understand it and are only repeating something they read from an uninformed reporter.

Exhaustion gaps
Exhaustion gaps are those that happen near the end of a good up or down trend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day’s close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume. It is almost a state of panic if during a long down move pessimism has set in.
Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise if they happen during a bull move, some bullish euphoria overcomes trades and they cannot get enough of that stock. The prices gap up with huge volume, then there is great profit taking and the demand for the stock totally dries up. Prices drop and a significant change in trend occurs. Exhaustion gaps are probably the easiest to trade and profit from. In the chart, notice that there was one more day of trading to the upside before the stock plunged. The high volume was the giveaway that this was going to be either an exhaustion gap or a runaway gap. Because of the size of the gap and an almost doubling of volume, an exhaustion gap was in the making here.

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5. Major Indicators and Oscillators
Types of indicators
Indicators can broadly be divided into two types “LEADING” and “LAGGING”.

Leading indicators
Leading indicators are designed to lead price movements. Benefits of leading indicators are early signalling for entry and exit, generating more signals and allow more opportunities to trade. They represent a form of price momentum over a fixed look-back period, which is the number of periods used to calculate the indicator. Some of the well more popular leading indicators include Commodity Channel Index (CCI), Momentum, Relative Strength
Index (RSI), Stochastic Oscillator and William’s %R.

Lagging Indicators
Lagging Indicators are the indicators that would follow a trend rather than predicting a reversal. A lagging indicator follows an event. These indicators work well when prices move in relatively long trends. They don’t warn you of upcoming changes in prices, they simply tell you what prices are doing (i.e., rising or falling) so that you can invest accordingly. These trend following indicators makes you buy and sell late and, in exchange for missing the early opportunities, they greatly reduce your risk by keeping you on the right side of the market. Moving averages and the MACD are examples of trend following, or “lagging,” indicators.

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Moving Averages - Simple and Exponential
Moving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. Moving averages lag because they are based on past prices. Despite this lag, moving averages help smooth price action and filter out the noise. They also form the building blocks for many other technical indicators and overlays, such as Bollinger Bands, MACD and the McClellan
Oscillator. The two most popular types of moving averages are the Simple Moving
.
Average (SMA) and the Exponential Moving Average (EMA). These moving averages
(EMA).
can be used to identify the direction of the trend or define potential support and resistance or levels.
Here's a chart with both an SMA and an EMA on it:

Click the chart for a live version
Simple Moving Average Calculation
A simple moving average is formed by computing the average price of a security over a specific number of periods. Most moving averages are based on closing prices. A 5
5-day
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simple moving average is the five day sum of closing prices divided by five. As its name implies, a moving average is an average that moves. Old data is dropped as new data comes available. This causes the average to move along the time scale. Below is an example of a
5-day moving average evolving over three days.

Daily Closing Prices: 11,12,13,14,15,16,17
First day of 5-day SMA: (11 + 12 + 13 + 14 + 15) / 5 = 13
Second day of 5-day SMA: (12 + 13 + 14 + 15 + 16) / 5 = 14
Third day of 5-day SMA: (13 + 14 + 15 + 16 + 17) / 5 = 15

The first day of the moving average simply covers the last five days. The second day of the moving average drops the first data point (11) and adds the new data point (16). The third day of the moving average continues by dropping the first data point (12) and adding the new data point (17). In the example above, prices gradually increase from 11 to 17 over a total of seven days. Notice that the moving average also rises from 13 to 15 over a three day calculation period. Also notice that each moving average value is just below the last price. For example, the moving average for day one equals 13 and the last price is 15.
Prices the prior four days were lower and this causes the moving average to lag.
Exponential Moving Average Calculation
Exponential moving averages reduce the lag by applying more weight to recent prices. The weighting applied to the most recent price depends on the number of periods in the moving average. There are three steps to calculating an exponential moving average. First, calculate the simple moving average. An exponential moving average (EMA) has to start somewhere so a simple moving average is used as the previous period's EMA in the first calculation.
Second, calculate the weighting multiplier. Third, calculate the exponential moving average. The formula below is for a 10-day EMA.

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SMA: 10 period sum / 10
Multiplier: (2 / (Time periods + 1)) = (2 / (10 + 1)) = 0.1818 (18.18%)
EMA: {Close - EMA (previous day)} x multiplier + EMA (previous day).

A 10-period exponential moving average applies an 18.18% weighting to the most recent price. A 10-period EMA can also be called an 18.18% EMA. A 20-period EMA applies a
9.52% weighing to the most recent price (2/ (20+1) = .0952). Notice that the weighting for the shorter time period is more than the weighting for the longer time period. In fact, the weighting drops by half every time the moving average period doubles.
If you want to us a specific percentage for an EMA, you can use this formula to convert it to time periods and then enter that value as the EMA's parameter:
Time Period = (2 / Percentage) - 1

3% Example: Time Period = (2 / 0.03) - 1 = 65.67 time periods

Below is a spreadsheet example of a 10-day simple moving average and a 10-day exponential moving average for Intel. Simple moving averages are straight forward and require little explanation. The 10-day average simply moves as new prices become available and old prices drop off. The exponential moving average starts with the simple moving average value (22.22) in the first calculation. After the first calculation, the normal formula takes over. Because an EMA begins with a simple moving average, its true value will not be realized until 20 or so periods later. In other words, the value on the excel spreadsheet may differ from the chart value because of the short look-back period. This spreadsheet only goes back 30 periods, which means the affect of the simple moving average has had 20 periods to dissipate. Stock Charts goes back at least 250-periods

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(typically much further) for its calculations so the effects of the simple moving average in the first calculation have fully dissipated.

The Lag Factor
Longer the moving averages more the lag. A 10 day exponential moving average will hug
10-day
prices quite closely and turn shortly after prices turn. Short moving averages are like speed boats - nimble and quick to change. In contrast, a 100 day moving average contains lots of
100-day
lot past data that slows it down. Longer moving averages are like ocean tankers - lethargic and slow to change. It takes a larger and longer price movement for a 100 day moving average
100-day
to change course.

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Click on the chart for a live version.
The chart above shows the S&P 500 ETF with a 10 day EMA closely following prices and
10-day
a 100-day SMA grinding higher. Even with the January February decline, the 100-day day January-February
100
SMA held the course and did not turn down. 50-day SMA fits somewhere between 10 and day 100 day moving averages when it comes to lag factor.
Simple vs. Exponential Moving Averages
Even though there are clear differences between simple moving averages and exponential moving averages, one is not necessarily better than the other. Exponential moving averages have less lag and are therefore more sensitive to recent prices - and recent price changes. p Exponential moving averages will turn before simple moving averages. Simple moving averages, on the other hand, represent a true average of prices for the entire time period. As such, simple moving averages may be better suited to identify support or resistance levels.
Moving average preference depends on objectives, analytical style and time horizon. and Chartists should experiment with both types of moving averages as well as different timeframes to find the best fit. The chart below shows IBM with the 50 day SMA in red
50-day

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and the 50-day EMA in green. Both peaked in late January, but the decline in the EMA was day decline sharper than the decline in the SMA. The EMA turned up in mid February, but the SMA continued lower until the end of March. Notice that the SMA turned up over a month after the EMA.

Lengths and Timeframes
The length of the moving average depends on the analytical objectives. Short moving average averages (5-20 periods) are best suited for short term trends and trading. Chartists
20
short-term interested in medium-term trends would opt for longer moving averages that might extend term 20-60 periods. Long-term investors will prefer moving averages with 100 or more periods. estors Some moving average lengths are more popular than others. The 200 day moving average
200-day
is perhaps the most popular. Because of its length, this is clearly a long long-term moving average. Next, the 50-day moving average is quite popular for the medium day medium-term trend.
Many chartists use the 50-day and 200 day 200-day moving averages together. Short-term, a 10-day term, 10 moving average was quite popular in the past because it was easy to calculate. One simply added the numbers and moved the decimal point. ers 47 | P a g e

Trend Identification
The same signals can be generated using simple or exponential moving averages. As noted above, the preference depends on each individual. These examples below will use both simple and exponential moving averages. The term "moving average" applies to both moving simple and exponential moving averages.
The direction of the moving average conveys important information about prices. A rising moving average shows that prices are generally increasing. A falling mov moving average indicates that prices, on average, are falling. A rising long term moving average reflects a long-term long-term uptrend. A falling long term long-term moving average reflects a long-term downtrend. term The chart above shows 3M (MMM) with a 150
150-day exponential moving average. This ng example shows just how well moving averages work when the trend is strong. The 150
150-day
EMA turned down in November 2007 and again in January 2008. Notice that it took a 15% decline to reverse the direction of this moving average. These lagging indicators identify lagging trend reversals as they occur (at best) or after they occur (at worst). MMM continued lower into March 2009 and then surged 40
40-50%. Notice that the 150-day EMA did not turn up day 48 | P a g e

until after this surge. Once it did, however, MMM continued higher the next 12 months.
Moving averages work brilliantly in strong trends.
Double Crossovers
Two moving averages can be used together to generate crossover signals. In Technical
Analysis of the Financial Markets, John Murphy calls this the "double crossover method".
Double crossovers involve one relatively short moving average and one relatively long moving average. As with all moving averages, the general length of the moving average defines the timeframe for the system. A system using a 5-day EMA and 35-day EMA would be deemed short-term. A system using a 50-day SMA and 200-day SMA would be deemed medium-term, perhaps even long-term.
A bullish crossover occurs when the shorter moving average crosses above the longer moving average. This is also known as a golden cross. A bearish crossover occurs when the shorter moving average crosses below the longer moving average. This is known as a dead cross. Moving average crossovers produce relatively late signals. After all, the system employs two lagging indicators. The longer the moving average periods the greater the lag in the signal. These signals work great when a good trend takes hold. However, a moving average crossover system will produce lots of whipsaws in the absence of a strong trend.
There is also a triple crossover method that involves three moving averages. Again, a signal is generated when the shortest moving average crosses the two longer moving averages. A simple triple crossover system might involve 5-day, 10-day and 20-day moving averages.

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The chart above shows Home Depot (HD) with a 10 day EMA (green dotted line) and 5010-day
50
day EMA (red line). The black line is the daily close. Using a moving average crossover would have resulted in three whipsaws before catching a good trade. The 10
10-day EMA broke below the 50-day EMA in late October (1), but this did not last long as the 10 day 10-day moved back above in mid November (2). This cross lasted longer, but the next bearish crossover in January (3) occurred near late November price levels, resulting in anot another whipsaw. This bearish cross did not last long as the 10 day EMA moved back above the
10-day
50-day a few days later (4). After three bad signals, the fourth signal foreshadowed a strong day move as the stock advanced over 20%.
There are two takeaways here. First, crossovers are prone to whipsaw. A price or time filter
First,
can be applied to help prevent whipsaws. Traders might require the crossover to last 3 days before acting or require the 10
10-day EMA to move above/below the 50-day EMA by a day certain amount before acting. Second, MACD can be used to identify and quantify these ng. 50 | P a g e

crossovers. MACD (10, 50, and 1) will show a line representing the difference between the
1)
two exponential moving averages. MACD turns positive during a golden cross and negative during a dead cross. The Percentage Price Oscillator (PPO) can be used the same way to show percentage differences. Note that MACD and the PPO are based on exponential moving averages and will not match up with simple moving averages.

This chart shows Oracle (ORCL) with the 50
50-day EMA, 200-day EMA and MACD (50, day 200, and 1). There were four moving average crossovers over a 2 1/2 year period. The first
).
three resulted in whipsaws or bad trades. A sustained trend began with the fourth crossover as ORCL advanced to the mid 20s. Once again, moving average crossovers work great when the trend is strong, but produce losses in the absence of a trend. hen 51 | P a g e

Price Crossovers
Moving averages can also be used to generate signals with simple price crossovers. A bullish signal is generated when prices move above the moving average. A bearish signal is generated when prices move below the moving average. Price crossovers can be combined to trade within the bigger trend. The longer moving average sets the tone for the bigger trend and the shorter moving average is used to generate the signals. One would look for bullish price crosses only when prices are already above the longer moving average. This would be trading in harmony with the bigger trend. For example, if price is above the 200day moving average, chartists would only focus on signals when price moves above the 50day moving average. Obviously, a move below the 50-day moving average would precede such a signal, but such bearish crosses would be ignored because the bigger trend is up. A bearish cross would simply suggest a pullback within a bigger uptrend. A cross back above the 50-day moving average would signal an upturn in prices and continuation of the bigger uptrend. The next chart shows Emerson Electric (EMR) with the 50-day EMA and 200-day EMA.
The stock moved above and held above the 200-day moving average in August. There were dips below the 50-day EMA in early November and again in early February. Prices quickly moved back above the 50-day EMA to provide bullish signals (green arrows) in harmony with the bigger uptrend. MACD (1,50,1) is shown in the indicator window to confirm price crosses above or below the 50-day EMA. The 1-day EMA equals the closing price. MACD
(1, 50,1) is positive when the close is above the 50-day EMA and negative when the close is below the 50-day EMA.

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Support and Resistance
Moving averages can also act as support in an uptrend and resistance in a downtrend. A short-term uptrend might find support near the 20 day simple moving average, which is term 20-day also used in Bollinger Bands. A long long-term uptrend might find support near the 200-day d 200 simple moving average, which is the most popular long term moving average. If fact, the long-term 200-day moving average may offer support or resistance simply because it is so widely day used. It is almost like a self-fulfilling prophecy. fulfilling 53 | P a g e

The chart above shows the NY Composite with the 200 day simple moving average from
200-day
mid 2004 until the end of 2008. The 200 day provided support numerous times during the
200-day
advance. Once the trend reversed with a double top support break, the 200
200-day moving average acted as resistance around 9500. verage Do not expect exact support and resistance levels from moving averages, especially longer moving averages. Markets are driven by emotion, which makes them prone to overshoots.
Instead of exact levels, moving averages can be used to identify support or resistance zones. averages 54 | P a g e

6. Trading Strategies
Harding introduced his seasonal MACD strategy in his 1999 book, riding the Bear.
Note that the S&P 500 peaked a year after this book came out. Harding’s seasonal MACD strategy combines the six month seasonal cycle from the Stock Trader’s Almanac and momentum using MACD, which was developed by Gerald Appel. Basically, MACD is used to confirm or trigger bullish and bearish signals within the guidelines of the six month cycle. According to the Stock Trader’s Almanac, using MACD greatly increased the profitability of the seasonal system and reduced risk.

Six Month Cycle
Discovered by Yale Hirsch, founder of the Stock Trader's Almanac, the six month cycle defines a bullish cycle running from November to April and a bearish cycle running from May to October. This is where the phrase "sell in May and go away" comes from.
While this cycle is certainly not infallible, statistics from the Stock Trader’s Almanac show the stock market seriously outperforming during the bullish six month period and underperforming during the bearish six month period. Over the past 50 years, the average gain for the Dow was less than 1% from May to October. In contrast, the average gain was more than 7% from November to April. The chart below shows the S&P 500 with the six month cycle over a ten year period. The red arrows mark the start of May (bearish cycle) and the green arrows mark the start of November (bullish cycle).

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Strategy
Sy Harding made some minor adjustments to the six month cycle and added MACD as a timing mechanism. First, Harding started the bullish cycle on October 16th, which is two weeks earlier. Starting the cycle a little earlier makes sense because there have bee several been October bottoms in the S&P 500. Second, Harding started the bearish cycle on April 20th, which is almost three weeks later. Third, Harding added MACD to time signals near these cycle dates (October 16th and April 20th). Chartists can move ahead to the next trading to date should April 20th or October 16th fall on a weekend.
There is more than one way to trigger a signal. A buy signal is triggered when the bullish cycle starts and MACD is on a bullish signal or when MACD turns bullish after the bulli bullish 56 | P a g e

cycle starts. A sell signal is triggered when the bearish cycle starts and MACD is on the bearish signal or when MACD turns bearish after the bullish cycle starts. MACD turns bullish when it moves above its signal line or into positive territory, whichever comes first. whichever MACD turns bearish when it moves below its signal line or into negative territory.

The chart above shows the S&P 500 with MACD from March 2011 to February 2012, which encompasses two cycles. The bearish cycle started on April 20th and M
MACD was already on a bearish signal (below its signal line). The bullish cycle started on October 16th and MACD was already on a bullish signal (above its signal line and in positive territory).

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Buy Signal Recap:
1. Buy on October 16th if MACD is bullish.
2. Wait for bullish MACD signal if MACD is not bullish on October 16th.
Sell Signal Recap:
1. Sell on April 20th if MACD is bearish
2. Wait for a bearish MACD signal if MACD is not bearish on April 20th.

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Tweaks
Harding tweaked this system even further by anticipating the six month cycle. While chartists do not really know when a MACD signal will trigger, we can figure out when the six month cycle will trigger. It is, after all, like clockwork. Knowing that the si month six cycle will turn bearish in May, traders can use the whole month of April to anticipate a sell signal in MACD. Similarly, traders can use the whole month of October to anticipate a buy signal. This requires a lot more discretion and intuition though. Taking a signal in April or though. October seems acceptable, but what about signals in late March or late September?

The chart above shows SPY from February 2010 to February 2011. MACD moved below its signal line in late April and SPY broke support in early May, both of which produced
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solid signals. SPY bottomed in early July and formed a higher low in August. MACD moved above its signal line in early September and broke resistance in mid September.
These signals were well before the bullish six month cycle started, but traders would have started, faced an overbought market they waited until October. Speculation requires anticipation.
Chartists can also consider using weekly charts and weekly MACD. However, only the signal line crossovers would work because the centerline crosses are too infrequent. The centerline chart below shows DIA with weekly MACD, bearish cycles in yellow and bullish cycles in white. There were some good signals, some bad signals and some none none-signals. For example, MACD did not turn down during the bearish cycle period from May 2009 until
October 2009.

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The six month cycle is not infallible. While adding MACD improves the historical results, it does not mean every signal will work. As with every system, there will be good signals, great signals, bad signals and ugly signals. The overall results are based on over 50 years of trading, which means over 100 signals. Most likely, the gains in some of the great signals made up for the losses in the bad signals to produce a positive result overall. Keep in mind that this article is designed as a starting point for trading system development. Use these ideas to augment your trading style, risk-reward preferences and personal judgments.

Swing Charting
What do Point & Figure charts, Kagi charts, Renko charts, Filtered Waves, and Zigzag have in common? They are all related to swing charting in some way. Swing charting follows a simple concept: additional information to the chart is made when a new price swing penetrates the level of the prior swing in the same direction. The basis of this type of charting is the filter. Once prices have moved by the distance specified by this filter, a new line is drawn next to the previous one. In a nutshell, it is a chart that shows up and down price movement of a minimum size regardless of the time it takes.
Another concept of swing charts is that it works similarly to a breakout system. A new high made after so many days is a buy signal and a sell signal occurs when a new low is made after so many days. This has been written about for years, by Gann, Merrill, Livermore,
Donchian, Hochheimer, Wilder, and Keltner, to name a few. They all used some form of swing charting.
Many swing based systems use volatility as the basis for determining the parameters to use for determining the swing filter. This way, as the current volatility increases, the number of days used in the calculation of the swing filter decreases.
One of the more simple swing systems was Donchian's Four-Week Rule. Buy when the current price goes above the highs of the previous 4 full weeks. Sell (go short) when the

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price falls below the lows of the previous 4 full weeks. That's it. Guess what? In 1970,
Dunn and Hargitt Financial Services rated it as the best of the popular systems of the day.
There are a host of different swing charting techniques. Some use 3 consecutive new highs as an up move and will remain as such until 3 consecutive new lows. The list is endless, but the concept is the same.
Arthur Merrill first wrote about filtered waves in his book, Filtered Waves, in 1977. His swing filter was merely a percentage of price movement. This technique removes actual price from the decision and can work on just about any time series. For all you engineers, it is just an amplitude filter; it helps remove undesirable information.
Zigzag is the term used by many charting programs, including StockCharts.com, for this filtered wave type of charting.

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One simple example is to display price data identifying only moves of 5% or greater.

One can see that it filters out all the small price variations and only shows the moves of 5% or greater.
IMPORTANT: One caveat however, the last leg of Zig at Zigzag is going to change as the most recent price changes until prices are reversed by the filter amount (5% in the above chart).
The important item is the turning point, which is the point at which prices have reached at least the filter amount since they reversed. If you see a turning point, then prices have already moved at least the filtered amount in the opposite direction. Ple
Please read this paragraph again.
Below is the same price data but with a 10% filter being used. Notice how it removed some of the smaller waves.

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Below is a chart using the exact same data, but with a filter of 15%. That is, only moves of
15% or greater are shown by Zig
Zigzag. Notice that the small up-move in the last few days of move the previous charts is gone. This is because prices have not moved upward by 15% since the down leg started.

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Swing charting is a viable tool for trading and making investment decisions. It covers all decisions. the basics:
•

stay with the trend

•

limit losses

•

follow well-defined rules defined 65 | P a g e

7. Findings

State bank of India has tested trendline at 1798 and it has also tested support level of 1674 in coming trading session script can test level of 1581

In oriental bank of commerce has tested trend line at 228 stock can test support level of 204

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Bank nifty rally has tested trend line at 11388 and in coming trading session it can test ty support level 10512

Nifty has tested trend line 6216 it can test target1 of 6142 and target 2 of 6028 rend 67 | P a g e

Calculation for the market performer’s outperformer and underperformance of bank stocks
Analysis of bank nifty participants for the duration of 3-nov-13 to 27-dec-13

AXISBANK

Market Performer

BANK OF BARODA

Under Performer

BANK OF INDIA

Outperformer

CANARA BANK

Market Performer

HDFC BANK

Outperformer

ICICI

Underperformer

INDUSINDIA

Outperformer

KOTAK BANK

Market Performer

PNBANK

Market Performer

SBI

Outperformer

UNION BANK

Outperformer

YESBANK

Market Performer

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Performance with BankNIFTY

YesBank
Union Bank
SBI
PNBank
Kotak Bank
IndusIndia Bank
ICICI
HDFC Bank
Canara Bank
Bank of India
Bank of Baroda axis bank

-4.00

-2.00

-

2.00

4.00

6.00

8.00

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8. Conclusions
•

Remember that stocks are never too high for you to begin buying or too low to begin selling. But after the initial transaction don’t make a second unless the first shows you a profit.

•

There is only one side to the stock market and it is not the bull side or the bear side but the right side.

•

Always sell what shows you a loss and keep what shows you profit.

•

Technical analysis can be used, when to buy and to when to sell the stock.

•

It is very helpful in determining the trend of the stock price.

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Bibliography:
The data was collected from the list of books and websites given below:
1. John J. Murphy Charting Made Easy 2000
2. PAULOS J. A Mathematician Plays the Stock Market 2003
3. www.investopedia.com
4. www.nseindia.com
5. www.stockchart.com
6. www.moneycontrol.com

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