FINACIAL TECHNICAL
ANALYSIS
Submitted to: Submitted by:
Prof. Sarfaraz Ansari Nihal Yadav
MBA FT- F (Joined)
1121211258
FUNDAMENTAL ANALYSIS
WHAT IS FUNDAMENTAL ANALYSIS?
Fundamental analysis is the examination of the underlying forces that affect the well being of
the economy, industry groups, and companies. As with most analysis, the goal is to derive a
forecast and profit from future price movements. At the company level, fundamental analysis
may involve examination of financial data, management, business concept and competition. At
the industry level, there might be an examination of supply and demand forces for the products
offered. For the national economy, fundamental analysis might focus on economic data to
assess the present and future growth of the economy. To forecast future stock prices,
fundamental analysis combines economic, industry, and company analysis to derive a stock's
current fair value and forecast future value. If fair value is not equal to the current stock price,
fundamental analysts believe that the stock is either overvalued or undervalued and the market
price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the
random walkers and believe that markets are weak-form efficient. By believing that prices do
not accurately reflect all available information, fundamental analysts look to capitalize on
perceived price discrepancies
General Steps to Fundamental Evaluation
Even though there is no one clear-cut method, a breakdown is presented below in the order an
investor might proceed. This method employs a top-down approach that starts with the overall
economy and then works down from industry groups to specific companies. As part of the
analyzing process, it is important to remember that all information is relative. Industry groups
are compared against other industry groups and companies against other companies. Usually,
companies are compared with others in the same group.
Economic Forecast
First and foremost in a top-down approach would be an overall evaluation of the general
economy. The economy is like the tide and the various industry groups and individual
companies are like boats. When the economy expands, most industry groups and companies
benefit and grow. When the economy declines, most sectors and companies usually suffer.
Many economists link economic expansion and contraction to the level of interest rates. Interest
rates are seen as a leading indicator for the stock market as well. Below is a chart of the S&P
500 and the yield on the 10-year note over the last 30 years. Although not exact, a correlation
between stock prices and interest rates can be seen. Once a scenario for the overall economy
has been developed, an investor can break down the economy into its various industry groups.
Group Selection
If the prognosis is for an expanding economy, then certain groups are likely to benefit more
than others. An investor can narrow the field to those groups that are best suited to benefit from
the current or future economic environment. If most companies are expected to benefit from an
expansion, then risk in equities would be relatively low and an aggressive growth-oriented
strategy might be advisable. A growth strategy might involve the purchase of technology,
biotech, semiconductor and cyclical stocks. If the economy is forecast to contract, an investor
may opt for a more conservative strategy and seek out stable income-oriented companies. A
defensive strategy might involve the purchase of consumer staples, utilities, and energy-related
stocks.
To assess an industry group's potential, an investor would want to consider the overall growth
rate, market size, and importance to the economy. While the individual company is still
important, its industry group is likely to exert just as much, or more, influence on the stock
price. When stocks move, they usually move as groups; there are very few lone guns out there.
Many times it is more important to be in the right industry than in the right stock! The chart
below shows that relative performance of 5 sectors over a 7-month timeframe. As the chart
illustrates, being in the right sector can make all the difference.
Narrow Within the Group
Once the industry group is chosen, an investor would need to narrow the list of companies
before proceeding to a more detailed analysis. Investors are usually interested in finding the
leaders and the innovators within a group. The first task is to identify the current business and
competitive environment within a group as well as the future trends. How do the companies
rank according to market share, product position, and competitive advantage? Who is the
current leader and how will changes within the sector affect the current balance of power?
What are the barriers to entry? Success depends on having an edge, be it marketing,
technology, market share or innovation. A comparative analysis of the competition within a
sector will help identify those companies with an edge, and those most likely to keep it.
Company Analysis
With a shortlist of companies, an investor might analyze the resources and capabilities within
each company to identify those companies that are capable of creating and maintaining a
competitive advantage. The analysis could focus on selecting companies with a sensible
business plan, solid management, and sound financials.
Business Plan
The business plan, model or concept forms the bedrock upon which all else is built. If the plan,
model or concepts stink, there is little hope for the business. For a new business, the questions
may be these: Does its business make sense? Is it feasible? Is there a market? Can a profit be
made? For an established business, the questions may be: Is the company's direction clearly
defined? Is the company a leader in the market? Can the company maintain leadership?
Management
In order to execute a business plan, a company requires top-quality management. Investors
might look at management to assess their capabilities, strengths and weaknesses. Even the best-
laid plans in the most dynamic industries can go to waste with bad management (AMD in
semiconductors). Alternatively, even in a mature industry, strong management can make for
increased success (Alcoa in aluminum). Some of the questions to ask might include: How
talented is the management team? Do they have a track record? How long have they worked
together? Can management deliver on its promises? If management is a problem, it is
sometimes best to move on.
Financial Analysis
The final step to this analysis process would be to take apart the financial statements and come
up with a means of valuation. This methodology assumes that a company will sell at a specific
multiple of its earnings, revenues or growth. An investor may rank companies based on these
valuation ratios. Those at the high end may be considered overvalued, while those at the low
end may constitute relatively good value.
Putting it All Together
After all is said and done, an investor will be left with a handful of companies that stand out
from the pack. Over the course of the analysis process, an understanding will develop of which
companies stand out as potential leaders and innovators. In addition, other companies would be
considered laggards and unpredictable. The final step of the fundamental analysis process is to
synthesize all data, analysis, and understanding into actual picks.
Technical Analysis
Types Of Charts
Line Chart: Line chart is formed by connecting closing prices of a stock. It is useful in
providing a clear illustration of the trend of prices of stock.
Bar Chart: bar chart is also known as OHLC chart, it is the most popular method that
trader uses to see price movement in stock market over a given period of time it help in
spotting trend and pattern in stock market.
Candlestick chart: Candlestick chart was invented by Japanese, it shows opening,
closing high and low price information for selected time horizon. It has three type of
pattern single candle pattern, dual candle pattern and three candle pattern.
Support and Resistant Levels
Support and resistant act as a barrier on daily chart; support is a level where a downtrend
can take a stop or reverse, support occurs due to a concentration of demand. Resistant occurs
when a uptrend is going to take a pause due to a concentration of supply.
Candlestick chart pattern
Candlestick charts are used by traders to determine possible price movement based on
past patterns.
Candlesticks are useful when trading as they show four price points (open, close, high,
and low) throughout the period of time the trader specifies.
Many algorithms are based on the same price information shown in candlestick charts.
Trading is often dictated by emotion, which can be read in candlestick charts.
Single Candle Pattern
As the name suggests, a single candlestick pattern is formed by just one candle. So as you
can imagine, the trading signal is generated based on 1 day's trading action. The trades based on
a single candlestick pattern can be extremely profitable provided the pattern has been
identified and executed correctly.
HAMMER
o Hammers have a small real body and a long lower shadow.
o Hammers occur after a price decline.
o The hammer candlestick shows sellers came into the market during the period but by
the close the selling had been absorbed and buyers had pushed the price back to near
the open.
o The close can be above or below the open, although the close should be near the open
in order for the real body to remain small.
o The lower shadow should be at least two times the height of the real body.
o Hammer candlesticks indicate a potential price reversal to the upside. The price must
start moving up following the hammer; this is called confirmation.
Inverted Hammer
It shows Trend Reversal
Long Legged Dozi
Dozi Shows indecision
Grave Stone Dozi
The Four Price Dozi
Dragonfly Dozi
Hanging Man
Marubozu
o If white morubozu after a end of
uptrend, continuation.
o If a White Marubozu at the end of a
downtrend, a reversal is likely
o If a Black Marubozu at the end of a
downtrend, a continuation.
o If a Black Marubozu at the end of an
uptrend, a reversal.
2. Candle Pattern
Bullish & Bearish
Simply put, "bullish" means that an investor believes that a stock or the overall market will go
higher, and "bearish" means that an investor believes a stock will go down, or underperform.
However, bullish can mean different things -- especially for short-term and long-term traders.
Bullish
Bearish
Rising window
A Rising Window candlestick pattern is more commonly known as a gap-up. But here at
Trendy Stock Charts I like to stick with the Japanese candlestick terminology when possible.
Window candlestick patterns provide very stiff support and resistance areas. In the case of a
Rising Window candlestick pattern, a bullish signal is being sent that shares are being
bought above the gap-up area more than are being sold.
When this happens, market makers adjust instantly by driving up the stock's share price to an
area where buying and selling demand are more in balance with each other.
This sharp increase in the stock price usually happens outside of the market's normal trading
hours, like after the release of great press or a fantastic earnings announcement.
Falling Window
The falling window is a fancy name for a price gap in a downward price trend. It occurs when
yesterday's low is above today's high, leaving a hole on the daily price chart.
The pattern appears in a falling price trend, and it acts as a bearish continuation pattern.
3.Candle Pattern
Evening star
o An Evening Star is a pattern used by technical analysts to predict future price
declines.
o Although it is rare, the Evening Star pattern is considered a reliable technical
indicator.
o The Evening Star is the opposite of the Morning Star pattern. The two are bearish and
bullish indicators, respectively.
Morning Star
o A morning star is a visual pattern made up of a tall black candlestick, a smaller black
or white candlestick with a short body and long wicks, and a third tall white
candlestick.
o The middle candle of the morning star captures a moment of market indecision where
the bears begin to give way to bulls. The third candle confirms the reversal and can
mark a new uptrend.
o The opposite pattern to a morning star is the evening star, which signals a reversal of
an uptrend into a downtrend.
Three White Soldiers
o Three white soldiers are considered a reliable reversal pattern when confirmed by
other technical indicators like the relative strength index (RSI).
o The size of the candles and the length of the shadow is used to judge whether there is
a risk of retracement.
o The opposite pattern of three white soldiers is three black crows, which indicates a
reversal of an uptrend.
Three Black Crows
o Three black crows are a reliable reversal pattern when confirmed by other technical
indicators like the relative strength index (RSI).
o The size of the three black crows and the shadow can be used to judge whether the
reversal is at risk of a retracement.
o The opposite pattern of three black crows is three white soldiers indicating a
reversal of a downtrend.
Reversal Pattern
Head and Shoulder
o A head and shoulders pattern is a chart formation that resembles a baseline with three
peaks, the outside two are close in height and the middle is highest.
o A head and shoulders pattern describes a specific chart formation that predicts a
bullish-to-bearish trend reversal.
o The head and shoulders pattern is believed to be one of the most reliable trend
reversal patterns
Reverse Head and Shoulder
Tringle Formation on daily charts
o A triangle is a chart pattern, depicted by drawing trendlines along a converging price
range, that connotes a pause in the prevailing trend.
o Triangles are similar to wedges and pennants and can be either a continuation pattern,
if validated, or a powerful reversal pattern, in the event of failure.
o There are three potential triangle variations that can develop as price action carves out
a holding pattern, namely ascending, descending, and symmetrical triangles.
Ascending Triangle
Descending Triangle
MOVING AVERAGE
o A moving average (MA) is a widely used indicator in technical analysis that helps
smooth out price action by filtering out the “noise” from random short-term price
fluctuations.
o Simple moving averages (SMA) takes the arithmetic mean of a given set of prices
over the past number of days, for example over the previous 15, 30, 100, or 200 days.
o Exponential moving averages (EMA) uses a weighted average that gives greater
importance to more recent days to make it more responsive to new information.
Understanding Moving Average (MA)
Moving average is a trend-following, or lagging, indicator because it is based on past prices.
The most common applications of moving averages are:
o to identify the trend direction
o to determine support and resistance levels.
While moving averages are useful enough on their own, they also form the basis for other
technical indicators such as the moving average convergence divergence (MACD)
The two basic and commonly used moving averages are the simple moving average (SMA),
which is the arithmetic average of a security over a defined number of time periods, and
the exponential moving average (EMA), which gives greater weight to more recent prices.
The simplest form of a moving average, appropriately known as a simple moving average
(SMA), is calculated by taking the arithmetic mean of a given set of values. In other words, a
set of numbers, or prices in the case of financial instruments, are added together and then
divided by the number of prices in the set.
The exponential moving average is a type of moving average that gives more weight to recent
prices in an attempt to make it more responsive to new information. Learning the somewhat
complicated equation for calculating an EMA may be unnecessary for many traders, since
nearly all charting packages do the calculations for you.
The formulas for the two most common moving averages are:
o Simple Moving Average (SMA) - calculates the arithmetic mean of a security over a
number (n) of time periods, A.
SMA=A1+A2+…+An
n
where: A=average in period
n=number of time periods
