Technical Analysis - WIRC-ICAI

Technical Analysis

Introduction Technical Analysis is the study of market action, primarilythrough the use of charts, for the purpose of forecasting futureprice trends. Technicians (also known as quantitative analysts or chartists)usually look at price, volume and psychological indicatorsover time. They are looking for trends and patterns in the data thatindicate future price movements.

Technical AnalysisThe Basic Assumption The Market Discount Everything Price Moves In Trends History Tends To Repeat Itself

Strength & Weakness ofTechnical Analysis StrengthFocus on PriceSupply, Demand andPrice ActionSupport/ResistancePictorial Price HistoryAssist with Entry PointWeaknessAnalyst BiasOpen to InterpretationToo LateAlways Another LevelTrader’s Remorse

Chart Type Charting Stocks Bar Charts and Japanese Candlestick ChartsPoint and Figure ChartsLine Chart Major Chart Patterns Price-based Indicators

Basic Technical Tools Trend Candle stick Trend Lines Moving Averages Price Patterns Indicators

Support & Resistance Support and resistance linesindicate likely end of trends.Resistance results from theinability to surpass prior high.Support results from theinability to break prior low.If support has broken than thatSupportlevel become the resistance,and vice-versa.BreakoutResistance

Historical Support & Resistance

Three types of trend Up Trend Down Trend Side Ways

Up TrendIt describes the price movement of a stock when the overalldirection is upward. A formal uptrend is when eachsuccessive peak and trough is higher than the ones foundearlier in the trend.UpTrendHigher Highs – HHHigher Lows - HLHHHHHHHLHLHL

Down TrendDescribes the price movement of a stock when the overalldirection is downward. A formal downtrend occurs wheneach successive peak and trough is lower than the onesfound earlier in the trend.Lower High – LHLower Low - LLLHLHLLLHLLLLLL

Sideways TrendIt Describes the horizontal price movement that occurswhen the forces of supply and demand are nearly equal. Asideways trend is often regarded as a period ofconsolidation before the price continues in the direction ofthe previous move. Equal Highs Equal LowsTrend Lines Showing Sideways Trend

Candlestick BasicsCandlestick charts are an effectiveway of visualizing price movements.There are two basic candlesticks: Bullish Candle: When the close ishigher than the open (usually greenor white) Bearish Candle: When the close islower than the open (usually red orblack)

Candlestick Parts There are three main parts to a candlestick: Upper Shadow: The vertical line between the high of theday and the close (bullish candle) or open (bearish candle). Real Body: The difference between the open and close;colored portion of the candlestick. Lower Shadow: The vertical line between the low of theday and the open (bullish candle) or close (bearish candle).

Candlestick Patterns Candlestick Charts is with multiple candlesticks formingreversal and continuation patterns. Bullish Engulfing PatternBearish Engulfing PatternDark Cloud CoverDojiEvening StarMorning StarHammer Hanging ManHaramiInverted HammerPiercing Line PatternShooting Star

Doji The open and close are very close together,creating a very small body It represent indecision between the bulls and thebears.

Long-Legged Doji A long-legged Doji is the same asDoji, except the upper and lowershadows are much longer than theregular Doji formation.

Example of Long-Legged Doji

Hammer

Hammer The Hammer candlestick formationis a significant bullish reversalcandlestick pattern that mainlyoccur at the bottom of downtrends. It has a long lower shadow twice thelength of the upper body.

Classic Example of Hammer

Classic Example of Inverted Hammer

Hanging Man

Hanging Man The Hanging Man candlestickformation is a bearish sign. Thispattern occur mainly at the top ofuptrends and is a warning of apotential reversal downward. There is a long lower shadow,which should be at least twice thelength of the real body.

Classic Example of Hanging Man

Shooting Star

Shooting Star The Shooting Star candlestickformation is a significant bearishreversal candlestick pattern thatmainly occur at the top ofuptrends. There is a long upper shadow,generally defined as at least twicethe length of the real body.

Classic Example of Shooting Star

Engulfing Patterns Engulfing patterns have one bearish and one bullish candle. The second candle must fully cover the first candle. Bullish or bearish, according to the second candle.

Bearish Engulfing Patterns

Bullish Engulfing Patterns

Morning Star

Morning Star It is a bullish candlestick pattern thatconsist of three candles. The first candle is a large bearishcandle located within a defineddowntrend. The second candle is a small bodiedcandle (bullish or bearish)that closesbelow the first red bar. The last candle is a large bullishcandle that open above the middlecandle and close near the middle ofthe first candle.

Classic Example of Morning Star

Evening Star

Evening Star An evening star is a bearishcandlestick pattern consisting ofthree candles. The first candle is a large whitebullish candlestick located withan uptrend. The middle one is a smallbodied candle(bullish or bearish)that close above the first candle. The last candle is a largebearish candle that open belowthe second candle and closesnear the first candle’s center.

Classic Example of Evening Star

Bearish Harami A trend indicated by a largecandlestick followed by a muchsmaller candlestick with thatbody is located within the verticalrange of the larger candle's body. Such a pattern is an indicationthat the previous upward trend iscoming to an end.

Bearish Harami

Bullish Harami A candlestick chart pattern inwhich a large candlestick isfollowed by a smaller candlestickwhose body is located within thevertical range of the larger body. In terms of candlestick colors, thebullish harami is a downtrend ofnegative-colored(RED)candlesticks engulfing a smallpositive (GREEN) candlestick,giving a sign of a reversal of thedownward trend.

Bullish Harami

Piercing Pattern The Piercing Pattern is a bullishcandlestick reversal pattern, There are twocomponents of a Piercing Patternformation: Bearish Candle(day 1) Bullish Candle (day 2) Piercing pattern will often end a minordowntrend. Green candle will close above the midpointand opening of the bearish candle ,i.e.more than halfway up the Red candle.

Piercing Pattern

Dark Cloud Cover A pattern where a black candlestickfollows a long white candlestick. It canbe an indication of a future bearishtrend. Essentially, the large black candle isforming a "dark cloud" over thepreceding bullish trend.The dark cloud must have a closingprice that is: within the price range of theprevious day.But below the mid-point betweenopen and closing prices of theprevious day.

Dark Cloud Cover

Trend Lines There are three basic kindsof trends: An Up trend whereprice are generallyincreasing.A Down trend whereprice are generallydecreasing.A Trading Range.

Simple Moving Averages Moving averages are used to identify current trends and trend reversals aswell as to set up support and resistance levels. Moving averages can be used to quickly identify whether a stock is movingin an uptrend or a downtrend depending on the direction of the movingaverage. when a moving average is heading upward and the price is above it,the stock is in uptrend. Conversely, a downward sloping moving averagewith the price below can be used to signal a downtrend. Another method of determining momentum is to look at the order of a pairof moving averages. When a short-term average is above a longer-termaverage, the trend is up. On the other hand, a long-term average above ashorter-term average signals a downward movement in the trend.Conti

Simple Moving Averages Moving averages are a powerful tool for analyzing the trend in a stock. Theyprovide useful support and resistance points and are very easy to use. Themost common time frames that are used when creating moving averages arethe 200-day, 100-day, 50-day, 20-day and 10-day. 200-days average is a good measure of trading year, a 100-day average forhalf a year, a 50-day average for quarter, a 20-day average for month and10-day average for two weeks.

Price & Moving Average Crossover Moving average trend reversals are formed in two main ways:When the price moves through a moving average and when it moves throughmoving average crossovers. The first common signal is when the price movesthrough an important moving average. For example, when the price of a security thatwas in an uptrend falls below a 50-period moving average, it is a sign that theuptrend may be reversing and vice-versa.

Moving Averages Crossover The other signal of a trend reversal is when one moving average crossesthrough another. For example, if the 50-day moving average crosses abovethe 200-day moving average, it is a positive sign that the price will startto increase.Negative CrossoverNegative CrossoverPositive Crossover

Head and ShoulderH&S Top This formation is characterizedby two small peaks on eitherside of a larger peak.HeadRight ShoulderLeft ShoulderNeckline This is a reversal pattern,meaning that it signifies achange in the trend.H&S BottomNecklineLeft ShoulderRight ShoulderHead

Example of Head & ShoulderSell SignalSell SignalMinimum Target PriceBased on measurement ruleMinimum Target PriceBased on measurement rule

Double Top & Double Bottom These formations are similar to the H&Sformations, but there is no head.These are reversal patterns with the samemeasuring implications as the H&S.The Double Top is a frequent priceformation at the end of a bull market. Itappears as two consecutive peaks ofapproximately the same price on a priceversus-time chart of a market.The Double Bottom describes as the drop ofa stock a rebound, another drop to the samelevel as the original drop, and finally anotherrebound.Double TopTargetTargetDouble Bottom

Example of Double BottomDouble Bottom

Example of Double TopDouble Top Reversal

Triangles Triangles arecontinuation formations.Ascending Three types: al Typically, price shouldgive break out near theapex,andtypicallybreakout would be in thedirection of the priortrend.Descending

Ascending Triangles

Rounding Top & Bottom Rounding formations are characterized by aslow reversal of trend. The Rounding Bottom is a long-termreversal pattern that is best suited forweekly charts. It is also referred to as asaucer bottom, and represents a longconsolidation period that turns from abearish bias to a bullish bias. A Rounding Top may form at the end of anextended upward trend and indicates areversal in the long-term price movement.The pattern can develop over several weeks,months or even years, and is considered arare occurrence by many traders.RoundingBottomRounding Top

Example of Rounded Bottom

Broadening Formation These formations are likereverse triangles. These formations usuallysignal a reversal of thetrend.Broadening BottomsBroadening Tops

Technical Indicators There are, literally, hundreds of technical indicators used togenerate buy and sell signals. We will look at few of the major indicators: Moving Average Convergence/Divergence (MACD) Relative Strength Index (RSI) Bollinger Bands

MACD MACD was developed by Gerald Appel as a way to keep track of a movingaverage crossover system. The MACD fluctuates above and below the zero line as the moving averagesconverge, cross and diverge. Traders can look for signal line crossovers, centerline crossovers anddivergences to generate signals. When the signal line goes from negative to positive, a buy signal isgenerated. When the signal line goes from positive to negative, a sell signal isgenerated. MACD is best used in choppy (trendless) markets, and is subject towhipsaws (in and out rapidly with little or no profit).

Example of MACDNegative CrossoverPositive Crossover