STOCK VALUATION –

TECHNICAL ANALYSIS
TECHNICAL ANALYSIS
 It is based on the premise that “history
repeats itself” and hence movement in
stock prices follow an established trend
which can be gauged from past price and
volume data.
 It involves the study of various charts,
ratios and patterns to predict future
direction of stock prices.
 Hence, once it is decided to invest in the
shares of a particular co, the right timing
of investment can be decided on the basis
of technical analysis.
BASIC PRPOSITIONS OF
TECHNICAL ANALYSIS
 The technicians believe that forces of
demand and supply are reflected in
the patterns of price and volume
traded.
 By examining such patterns, he
predict whether prices will move up
or will go down.
 Thus, technicians believe that price
fluctuations reflect logical and
emotional forces.
BASIC PRPOSITIONS OF
TECHNICAL ANALYSIS
1. The price of a security is determined by
the demand and supply forces
operating in a market.
2. Prices tend to move in trends over long
term. This long term trend sets the
direction of market prices.
3. Price fluctuation reflect logical and
emotional forces.
4. Price movements, whatever their
cause, once in force persist for some
period of time and can be detected.
BASIC PRPOSITIONS OF
TECHNICAL ANALYSIS
5. The trends in security prices may
reverse due to shift in demand and
supply.
6. The changes in demand and supply
can be predicted well in advance with
the help of charts and technical tools.
Hence the task of technical analyst is to:
 Identify the trend and
 Recognize when one trend comes to
an end and prices start moving in the
opposite direction.
TOOLS OF TECHNICAL
ANALYSIS
 TA can be performed both at the
market level and at an individual
company level using various types
of charts, ratios, patterns or
indicators.
 Here, the market indicators and
individual stock indicators are
examined separately.
CHARTS

 Charts are the basic tools for

performing TA.
 Charts can be of various types such
as line chart, bar chart, point and
figure chart and candlestick chart.

 On a particular day, the price of a

share may vary many times. It is
difficult to plot all the prices
prevailing for a particular stock on a
particular day.
CHARTS
 Generally the following four prices are
of interest to an investor:
 Open price – Price at which trading of
a share starts on a particular day.
 Close Price – Price at which trading of
a share closes on a particular day.
 High Price – It is the highest price at
which the share has been traded on a
particular day.
 Low Price - It is the lowest price at
which the share has been traded on a
particular day.
LINE CHART
 X-axis shows the time or no. of
days/week
 Y-axis shows stock prices.
 Only closing prices are shown on line
charts.
LINE CHART
 It is easy to draw but it does not
reveal anything about the intraday
volatility of the stock price.
 It shows only the closing prices and
not other prices.
LINE CHART
BAR CHART
 It shows high, low, and closing prices of a
stock everyday.
 Open price of the day is generally equal to
the closing price of the previous day. Hence,
it is generally not shown on a bar chart.
 The length of the bar shows the range or
price, i.e., the highest price minus the
lowest price in a particular day.
 But if bar length increases overtime, it may
be regarded as a signal of increasing stock
volatility.
BAR CHART
BAR CHART
POINT AND FIGURE CHART
 It is a chart made up of X’s and O’s.
 X is placed for increase and O for
decrease in stock price.
 A buy signal is implied when X lines are
moving up after every O line.
 If O lines are going down after every X
line, then a sell signal is triggered.
 In this chart, the axis do not represent
time or price level, rather they just show
the directional movement of prices
irrespective of the quantity of change.
POINT AND FIGURE CHART
POINT AND FIGURE CHART

 The columns are changed when

there is a change in direction, i.e.,
from the increasing prices if the price
starts declining then we switched to
second column and indicator O.
 After that the price starts increasing,
therefore we then shift to another
column and put X sign for every
increase.
 Main advantage is such a chart can
CANDLESTICK CHART

 This type of chart shows a candle for

every day price movement.
 It shows. High, low, open and close price.
 If close price is lower than open price,
then the box is filled with black colour
otherwise left empty.
 An increasingly dark candlesticks are
bearish indicators.
 On x axis we measure time and on y axis
we measure share price.
CANDLESTICK CHART
PRICE AND VOLUME CHART

 It shows the high, low and close price

of a share along with its volume in
the same chart.
PRICE AND VOLUME CHART
MARKET INDICATORS

 They are the charts or trends which

provide the general direction of the
market.
 It covers the following theory:
1. DOW THEORY:
 Given by Charles Dow, the
grandfather of TA. It is based o the
assumption that stock market doest
not move on random basis rather
there are set of trends which can
MARKET INDICATORS
 Three trends simultaneously work in any
type of market whether bullish or bearish.
(A) Primary Trend: It is the long term trend
over a period lasting more than one
year. This trend sets the overall direction
of the market. If primary trend is upward
then bull market is in operation
otherwise market is bearish.
(B) Intermediate Trend: This trend lasts
for a few months and operate in the
opposite direction of primary trend.
MARKET INDICATORS
If the primary trend is upward then
intermediate trend will be downward
and vice-versa. They are also known
as “secondary corrections”.
(C) Tertiary or Minor Trends: they
are the day to day or intra-day
fluctuations in stock market which do
not last for long. These trends are
given least importance.
MARKET INDICATORS

 BULL MARKET-
 It is in operation when successive
high points are higher than previous
highs and successive low points are
also higher than the previous low
points.
 Therefore, in the bull market, it is
good time to buy during secondary
corrections, i.e., the period of decline
which do not last long.
MARKET INDICATORS
MARKET INDICATORS

 BEAR MARKET-
 Bear market is in operation when
successive high points are lower than
the previous lows and successive low
points are also lower than the
previous low point.
 The intermediate trend is the period
of increase in this bear market.
 Therefore, right time to sell is during
the periods of intermediate
MARKET INDICATORS
MARKET INDICATORS

2. ELLIOT WAVE THEORY:

It is a variant of Dow theory. Stock
prices can be described by a set
wave pattern – long term, short term
and minor waves
Long term waves carry the entire
market up or down value, short term
wave move in the opposite direction.
Minor waves are daily fluctuations in
the market and can be ignored by
MARKET INDICATORS

3. MOVING AVERAGE ANALYSIS:

 It is a statistical technique to find out
average of a series on rolling basis.
 200 days or 53 weeks moving
averages are most popular in the
analysis of overall market trend.
 It is one of the most reliable and
easily understandable technical
indicators available to technical
analysts and investors.
MARKET INDICATORS
MARKET INDICATORS
4. MARKET BREADTH ANALYSIS:
 It is the spread between the no of
stocks that advance and decline in
price.
 For E.g.- if on a particular day, 300
stocks advance in prices while 200
stocks decline in prices, then market
breadth will be 300-200 = 100.
 A cumulative breadth can be
calculated, if it is increasing then it is
a bullish signal.
MARKET INDICATORS
5. CONFIDENCE INDEX:
 Confidence index = (Avg. yield on
top 10 rated bonds)/ (Avg. yield on
10 intermediate rated bonds)
 Higher values of confidence index
suggest bullish nature of the market.
 This ratio will always be below 1.
 MARKET INDICATORS
6. ODD LOT THEORY:
 The theory speaks that generally small
investors make wrong purchase, they
buy heavily at the peak of the market
and sell in huge quantities at the
bottom of the market.
 Odd lot ratio = Odd lot purchases / Odd
lot sales
 If the ratio is greater than 1 and
continuously increasing then it implies
that market will turn bearish in near
SPECIFIC STOCK INDICATORS

(A) SUPPORT AND RESISTANCE

LEVEL-
 It can be identified both for market
index as well as individual stocks.
 Support level is that price, below
which the price is not expected to
fall.
 Resistance level is that above which
price does not go.
 If stock price breaches its support
SPECIFIC STOCK INDICATORS

 On the other hand, if stock price breaches

the resistance level, it indicates a bullish
phase and the stock is expected to rise
further.
 Support ad resistance level indicate the
lower and upper limit respectively, within
which stock prices are expected to move.
 However, those limits do not remain
constant overtime. They may change. In a
bull market the support and resistance level
may be revised upwards and vice versa.
SPECIFIC STOCK INDICATORS
SPECIFIC STOCK INDICATORS
2. Double Bottom and Double Top
Chart
SPECIFIC STOCK INDICATORS
SPECIFIC STOCK INDICATORS
3. HEAD AND SHOULDER:
SPECIFIC STOCK INDICATORS
4. INVERTED HEAD AND
SHOULDER:
SPECIFIC STOCK INDICATORS
5. TRIANGLES:
SPECIFIC STOCK INDICATORS

6. FLAGS:
 It is detected when a bull rally or bear
phase enters into consolidation
pattern which appears as a rectangle
or parallelogram.
 It is predicted that after the
consolidation phase is over, the stock
price will move in the same direction
in which they are moving before the
formation of flag pattern.
SPECIFIC STOCK INDICATORS
SPECIFIC STOCK INDICATORS

7. RELATIVE STRENGTH:
 In this we compare a stock’s
performance over a recent period to
the market performance or other
stocks in the same industry.
 Ratio = Stock price / market index.
 If the ratio increases overtime it
shows relative strength of the stock
and hence its profitability.
LIMITATIONS OF TA

 Requirement of interpretational skills

 Subjective analysis and behavioural
biases
 Late response to the chart pattern
 Short term perspective (for LT FA is a
better approach)
PITTFALLS TO AVOID WHILE
INVESTING
 Putting all your money in one particular
share or shares of particular industry
 Thinking short term
 Holding on bad shares
 Not being patient
 Borrowing for investing
 No rebalancing of portfolio
 Buying because a share is low & selling
because it is high.
Thank you