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    Technical Analysis Part 1 PDF

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    Shrey Saxena

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    Technical Analysis Part 1 PDF

    Uploaded by

    Shrey Saxena
    87 views57 pages

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    Technical Analysis Part 1.pdf

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    87 views57 pages

    Technical Analysis Part 1 PDF

    Uploaded by

    Shrey Saxena

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
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    of 57

    Six Tenets of Dow Theory

    1. The market discounts everything


    2. The market has three trends
    3. Primary trend of the market has three phases
    4. Stock index averages must confirm each other
    5. Market trend is confirmed by volume
    6. Trend continues until a clear reversal happens

    2nd Tenet of Dow Theory


    The market has three trends
    Primary > 1 year
    Secondary (Intermediate)> 3 weeks to 3 months
    Minor < 3 weeks

    Remember: Greater the time period a trend comprises, the more important the
    trend.

    Primary, Secondary and Minor Trend

    3rd Tenet of Dow Theory


    Primary trend of the market has three phases
    Primary Upward Trend (Bull Market)
    Accumulation Phase
    Public Participation Phase
    Excess Phase

    Primary Downward Trend (Bear Market)


    Distribution Phase
    Public Participation Phase
    Panic Phase

    Accumulation Phase

    (Primary Upward Trend)

    1st stage of the upward trend


    Informed investors enter buying positions
    Attractive valuations and thus, limited downside risk
    But, most difficult to spot the accumulation phase
    Highest level of pessimism

    Public Participation Phase

    (Primary Upward Trend)

    Improvement in business conditions (earnings growth, economic data)


    Negative sentiments on decline
    Confirms the resumption of upward trend
    Long lasting phase featuring largest market move

    Excess Phase

    (Primary Upward Trend)

    When you often hear Economy is doing extremely fine, and it can get only better
    from this
    Retail participation increases in buying
    Smart money starts exiting
    Last portion of buyers enters into buying positions
    Last stage in Upward Trend

    Excess Phase

    (Primary Upward Trend)

    Distribution Phase
    1st stage of the downward trend
    Informed investors sell
    Highest level of optimism
    Buying by last portion of buyers continue
    Difficult to spot the phase

    (Primary Downward Trend)

    Public Participation Phase


    Long lasting phase featuring largest market move
    Increased negative sentiments
    Selling pressure intensifies
    Low business confidence
    Decline in earnings/economy growth

    (Primary Downward Trend)

    Panic Phase
    Large sell-off in a short time period
    Panic selling starts

    (Primary Downward Trend)

    Panic Phase

    (Primary Downward Trend)

    4th Tenet of Dow Theory


    Stock index averages must confirm each other
    Difficult to spot the new trend if one index is showing new uptrend and another is
    not
    Disparity in major indexes will doubt the new trend

    Stock indices average confirmation

    5th Tenet of Dow Theory


    Market trend is confirmed by volume
    Buy and Sell decision based on the price movement of stock/index
    Volume is used to confirm the price movement
    Sign of weakness in current trend when volume runs counter to the trend

    6th Tenet of Dow Theory


    Trend continues until a clear reversal happens
    Brief correction in the primary trend need not to be used as a reversal of primary
    trend
    Waiting for a little clarity in the trend helps
    Trend is your friend, never buck the trend

    Important to note
    Focus is on Closing Price and not on Intra-day Movement to determine the trend
    Trading Ranges is important to forecast where the market is headed
    Brief correction in the primary trend need not to be used as a reversal of primary
    trend
    Waiting for a little clarity in the trend helps
    Trend is your friend, never buck the trend

    Points to be considered
    Use of only closing prices for knowing the Trend or Trend Reversal
    Entry only above a trading range
    Very important to identify the trend reversal while using the theory

    Criticisms of Dow Theory


    Late recognition of the new trend results
    Captures a small portion of the new trend
    Different trends not strictly defined

    Secondary trend beginning may sometimes seem like a primary trend beginning

    Theory not much profitable for short-term trading

    Market Cycles
    Four Phases of Market Cycles

    Accumulation
    Mark-Up
    Distribution
    Mark-Down

    Market Cycles

    Accumulation Phase
    Market trend is bearish but some buying starts slowly
    Who enters

    Smart Money
    Value investors
    Professional traders
    Corporate insiders

    When news headlines read often Market doomsday is near


    Market sentiments turn neutral

    Mark-Up Phase
    Stability of up move increases
    Jump in volume
    Valuations go above the average
    You start to hear This time is different
    Largest gains in shortest period
    Market euphoria

    Distribution Phase
    Selling flow slowly starts dominating
    Cyclical up trend turns into sideways movement

    Mark Down Phase


    Heavy Selling
    Undisciplined Traders turns investors

    Sector Rotation
    What is Sector Rotation?
    Relation between Market Cycles and Sector Rotation
    Importance in Asset Management
    How to allocate capital in various sectors in different Market Phase
    Used by Asset Management Companies, Money Mangers (Portfolio Managers),
    Professional Traders

    Volume
    Totally an independent variable from price
    Volume normally goes with the trend
    Volume leads price during a bull move
    Always remember:
    If Price and Volume momentum agree trend to continue
    If Price and Volume momentum disagree trend not as strong as it looks

    Market Breadth
    Shows the intensity of Bulls and Bears
    New High or New Low shows the enthusiasm of traders
    Advance Decline Line

    McClellan Oscillator
    Measures short-term market breadth momentum
    Difference between 19-day EMA and 39-day EMA (Exponential Moving Average) of
    advancing minus declining stocks

    TRIN (Arms Index)


    Invented by Richard Arms
    Compares 1) Advances, 2) Declines, 3) Volume
    Above 1 = Bearish
    Below 1 = Bullish

    TRIN (Arms Index)

    Alligator

    Developed by Bill Williams


    When the alligators mouth is closed, he is sleeping
    More it sleeps, bigger the break-out
    When it gets awake, the green line moves first
    Helps to ride a break-out or longer move

    Alligator

    Parabolic SAR
    Developed by Welles Wilder
    Criticism of Trend Following System: Not the whole move can be
    captured
    Parabolic SAR for capturing maximum movement
    Multi use 1) for Entry point, 2) Trailing stoploss
    Signal
    Buy = When Price crosses above it
    Sell = When Price crosses below it

    Parabolic SAR

    Bollinger Bands

    Developed by John Bollinger


    Adjusts to volatility
    Widens when volatility moves up
    Narrows when volatility goes down
    It consists of three lines:
    Upper Band = 2 standard deviation above the middle band
    Middle Band = 20-day simple moving average (SMA)
    Lower Band = 2 standard deviation below the middle band

    Bollinger Bands

    Directional Movement
    Developed by Welles Wilder
    Measures the strength of the trend without regard to current
    trend direction
    +DI = Plus Directional Indicator
    -DI = Minus Directional Indicator
    BUY- when DI+ moves above -DI
    SELL when DI+ moves below -DI

    Directional Movement

    Significance of Divergence
    Divergence in trend of PRICE vs INDICATOR
    What does it mean?
    How to use it for profit?

    MACD Bearish Divergence

    KST Know Sure Thing

    Developed by Martin Pring


    Is a momentum indicator
    Weighted average of four ROC values
    Can be used as following:

    Overbought/Oversold zone
    Divergences
    Signal Line Crossover
    Through trendlines

    KST

    What is Technical Analysis


    Method is for forecasting
    Price Movement
    Market Trend

    Forecasting is based on
    Price
    Volume
    Past market action

    Chart is worth thousand words


    Can be used on any instrument for which data is available

    Analysis
    Market discounts everything
    Price moves in trend
    History tends to repeat itself (Behavioral Finance)

    Types of Trends
    Types of Trend (trend wise):
    Up Trend
    Down Trend
    Sideways Trend

    Type of Trend (duration wise):


    Short-term Trend
    Medium-term Trend
    Long-term Trend

    Trendline, Support, Resistance


    Trendline is a line where major points of price move touches the price
    point.
     The greater the number of touches, the more crucial a
    Trendline becomes
    Support is a point where buying is likely to remain strong to prevent
    the price from falling further.
    Resistance is a point where selling is likely to remain strong to prevent
    the price from rising further.

    Practical use of Trendline

    Example Break of long term Support (Reliance Industries)

    Example - Resistance

    Intermarket Technical Analysis


    What is Intermarket Analysis
    Applying technical analysis in intermarket linkages

    Why Intermarket Analysis


    All markets are interrelated
    No market is immune to other market
    Markets dont move in isolation

    Intermarket Technical Analysis of


    Stock Market
    Bond Market
    Commodities Market
    Currency Market

    What is different in doing Intermarket Analysis?


    Here, divergence between Bonds and Stocks is analysed same as divergence between stock index and RSI

    Intermarket Technical Analysis


    Basic guidelines for Intermarket Technical Analysis
    All markets are interrelated
    Intermarket work provides important background data
    Intermarket work uses external data
    Technical Analysis is the preferred choice
    Heavy emphasis on futures markets
    Futures oriented indicators are employed

    Commodities Prices and Bonds


    Inflation is the key
    Inverse relationship between Commodities and Bond prices
    Chain of rising commodities prices inflation monetary policy rising interest rate

    Stock Market and Bonds


    Bonds a leading indicator of stocks
    Rising bond market is bullish for stocks
    Falling bond market is bearish for stocks
    Warning sign - if bond market shows divergence from stock market

    Commodities and Dollar


    Inverse relation between Bonds and Commodity prices
    Positive relation between Bonds and Equities
    Rising dollar = Positive for both Bonds and Equities
    Falling dollar = Negative for both Bonds and Equities
    Rising dollar = Falling Commodities Prices = Positive Bonds and Equities
    Falling dollar = Increase in Commodities Prices = Negative for Bonds and Equities

    Copper as Market Indicator


    Copper is a leading indicator of economy
    Is used in Housing, Automotive
    Declining Copper price = Slowing economy
    Increase in Copper price = Rising/Strong Economy

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