Documente Academic
Documente Profesional
Documente Cultură
Submitted By
Anuradha Gupta
PGDM(2008-10)
Roll no- 0125142128
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ACKNOWLEDGEMENT
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TO WHOMSOEVER IT MAY CONCERN
Lastly, I would like to thank your esteemed institution for providing your students
such a platform; for them to learn from their experiences while carrying out these
studies.
Warm regards,
(Rahul Kumar Agarwal)
Area Sales Manager
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DECLARATION
I, Ms. Anuradha Gupta do hereby declare that the project report
titled “ BASICS OF FUNDAMENTAL AND TECHNICAL
ANALYSIS” is a genuine research work undertaken by me and it
has not been published anywhere earlier.
ANURADHA
GUPTA
BLS Institute of
Management
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CERTIFICATE BY THE FACULTY GUIDE
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Table of content
Executive summery
Company Profile
Portfolio Management
Fundamental Analysis
Technical Analysis
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Executive summery
This project has been a great learning experience for me; at the same time it
gave me enough scope to implement my analytical ability. This project as a
whole can be divided into several parts:
The first part gives an insight about the about the company and its various
aspects. I got an opportunity to learn what is really meant by fundamental &
technical analysis in stock market, how is it implemented in the stock market
and improved on my learning in class where we just went through the basics.
Fundamental analysis is an examination of future earnings potential of a
Company, by looking into various factors that impact the performance of the
Company. The prime objective of a fundamental analysis is to value the stock
And accordingly buy and sell the stocks on the basis of its valuation in the
Market Technical analysis mainly based on intraday trade and predicting the
price movements which require in depth study of live charts changing every
minute with the market.
Also I present some fact and figure that help investor in fundamental analysis
and one sample of analysis to know about how to do technical analysis The
second part consists of preparation of technical reports on a daily / weekly
basis in which we try to give a near accurate prediction of support &
resistance levels of stock etc.
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ORGANIZATIONAL
PROFILE
HCBC INVEST
DIRECT (INDIA)
LTD
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ORIGIN OF THE ORGANISATION
• HSBC InvestDirect (India) ltd is one of the leading financial services organizations
in India. The company is providing customized financial management solutions to
individuals and corporate. Their principal activities are to provide brokerage
related, investing and financial services. They also provide loan and credit activities,
insurance products and security dealing services.
• At IIL, we believe in "Realizing your goals together". You will find in us - a trusted
investment partner to help you work towards achieving your financial goals. Our
institutional expertise, combined with a thorough understanding of the financial
markets results in appropriate investment solutions for you.
• Our strong team of RelationshipManagers, Customer Service Executives, Advisory
Managers and Research Analysts offers efficient execution backed by in-depth
research, knowledge and expertise to customers across the country.
YEAR EVENTS
1997-1998 February 1998 commenced equity broking on NSE.
March 30, 2000 ORIX subscribed to 80, 00, 000 equity shares.
March 30, 2000 K. Raheja group subscribed to 30, 00, 000 equity
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shares.
2000-2001 April 14, 2000 change in the registered office of the company.
Setup a dedicated mutual fund desk and fixed income retail desk at
branch locations.
2007 IL&FS Investsmart Ltd has informed that Mr. Mitchell Caplan,
Chief Executive Officer and Director of E*TRADE FINANCIAL
Corporation, USA has been appointed as an Additional Director on
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the Board of the Company
• The company received the 'Best Performing National Financial Advisor Award'
from CNBC for the two years.
Vision
To become a long term preferred long term financial to a wide base of customer whilst
optimizing Stake holder value.
Mission
To establish a base of 1 million satisfied customer by 2010
We will crest this by being a responsible trustworthy partner.
Corporate action
An approach to business that reflects responsibility, transparency and ethical behavior.
Respect for employee client and stake holder group.
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HSBC Acquires IL&FS Investsmart in India
About HSBC
The HSBC Group in India is represented by several entities including The Hong Kong and
Shanghai Banking Corporation Limited which offers a full range of banking and financial
services to its over 2.8 million customers in India through its 47 branches and 170 ATMs
across 26 cities. HSBC is one of India's leading financial services groups, with over 34,000
employees in its banking, investment banking and capital markets, asset management,
insurance broking, two global IT development centers and six global resourcing operations
in the country. The Bank is the founding and a principal member of the HSBC Group
which, with over 9,500 offices in 85 countries and territories and assets of US$2,547 billion
at 30 June 2008, is one of the world's largest banking and financial services organizations.
Acquisition
• HSBC has completed the acquisition of 93.86 per cent of IL&FS Investsmart
Limited (Investsmart), a leading retail brokerage in India, for a total consideration
of INR1, 311.0 Crore (approximately US$296.4 million).
• Sandy Flockhart, Group Managing Director and Chief Executive Officer of HSBC
Asia- Pacific, said: "Investsmart gives HSBC access to the world's third-largest
investor base, with over 20 million retail investors. In fact, the business already has
143,000 customers and operates in 128 cities. With Indian GDP expected to grow by
7.8 per cent in 2009, the opportunity here is obvious and underlines why HSBC has
a stated strategic aim of focusing on high-growth economies."
• Under the transaction agreement, HSBC acquired 43.85 per cent of Investsmart
from E*TRADE Mauritius Limited, an indirectly wholly-owned subsidiary of
E*TRADE Financial Corporation, and 29.36 per cent from Infrastructure Leasing
and Financial Services Limited (IL&FS). The decision to acquire a controlling stake
in Investsmart triggered an open offer to public shareholders, through which HSBC
has accepted shares equivalent to 20.65 per cent of Investsmart's capital.
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• E*TRADE Mauritius Limited, IL&FS and those that tendered shares through the
open offer received INR200 per share for their Investsmart shares. In addition,
IL&FS was paid, as part of a three-year non-compete agreement, INR82.0 crore
(approximately US$17.9 million). In accordance with local regulations, HSBC paid
interest of INR2.3 per share to the public shareholders who tendered their shares.
This amounted to INR3.31 crore approximately US$0.72 million).
Service
By
IL&FS
Investsmart
Securities
Private
Limited
Retail offering-
Retail offerings of IIL seek to cover all financial planning requirements of individuals,
which include providing personalized investment management services including planning,
advisory, execution and monitoring of the full range of investment services. Broadly the
retail services are divided into two broad categories.
• Advisory Services:
Portfolio Management Services, Mutual Funds, Insurance.
• Trading Services:
Equities, Derivatives, IPO’s
Institutional offering
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IL’s Institutional business thrives on the strong relationships we have built among
domestic mutual funds, banks, financial institutions, insurance companies and private
sector funds over the past few years
• Merchant banking
• Institutional debt market
Online trading
Online trading allows you to buy and sell shares on the exchange through Internet. It is
a truly powerful medium to be in direct control of your investments
Advisory services
EQUITY
IPO Derivative
FUNCTIONAL
AREA
PMS Insurance
On line
Trading
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IPO- Initial public offering
PMS- Portfolio management services
Board of Directors
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Avdhoot Deshpande Head – Equity and Capital Markets
PRODUCT
SMART INVEST
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ORGANISATION STRUCTURE
CEO
TRAINEES
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Online product offering (WEB BASED)
SMARTSTART
Features
• Trade on NSE & BSE
• Simple order entry for Equity & Derivatives
• Fully Customizable display
• User friendly Get Quote screen
• Integrated Accounts (Bank. Demat & Trading)
• Live order status
• Track your orders real-time
• Dynamic buying power
• Works behind a Proxy
• Back office access
SMARTINVEST
Features
• Instant Loading
TRADING ACCOUNT
BANK ACCOUNT OR
LEDGER DEMATE ACCOUNT
BANK ACCOUNT-
For settlement of transaction and it is the rule that no money or rupee transaction will be
done in stock market that is govern by RBI.
Trading account-
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For buying and selling of the share that is govern buy two major stock exchange namely
NSE and BSE
Demate account
Like a self where you can put your shares in dematerished form, the demate governing
body is two depository of India they are NSDL, and CDSL.
If one of the above will not be their, it is not possible to enter into the transaction in stock
market and the over all governing body is SEBI.
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BASICS OF
STOCK
MARKET
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What is an investment?
An investment is the current commitment of dollars for a period of time in order to derive
future payments that will compensate the investor for
(1) The time the funds are committed,
(2) The expected rate of inflation, and
(3) The uncertainty of the future payments
• Time frame-
Short term –
Money market, saving bank account, liquid fund, bank fixed deposit
for short term
Long term-
Post office saving, public provident fund, mutual fund,
Bonds debenture and shares
• Assets-
Physical assets-
real estate, gold jewellery, and commodity
Financial assets-
bank instrument and securities market instrument
• Market-
Primary market-
IPO, FPO, Right Issue & Preferential Issue
Secondary market-
Share, Bond, Derivative, Mutual funds
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• Invest early
• Invest regularly
• Invest for long term not for short term
• Securities Markets is a place where buyers and sellers of securities can enter into
transactions to purchase and sell shares, bonds, debentures etc.
• Transfer of resources from those having idle resources (investors) to others who
have a need for them (corporate) is most efficiently achieved through the securities
market.
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• SECURITIES CONTRACTS (REGULATION) RULES, 19576.3 SECURITIES
AND EXCHANGE BOARD OF INDIA ACT, 1992
• SEBI (STOCK BROKERS & SUB-BROKERS) REGULATIONS, 1992
• SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 1992
• SEBI (PROHIBITION OF FRAUDULENT AND UNFAIR TRADE
PRACTICES RELATING TO SECURITIES MARKETS) REGULATIONS,
2003
• THE DEPOSITORIES ACT, 1996
• INDIAN CONTRACT ACT, 1872\
• THE COMPANIES ACT, 1956
• GOVERNMENT SECURITIES ACT 2006
• INCOME TAX ACT, 1961
• MONEY LAUNDERING ACT, 2002
• SECURITIES TRANSACTION TAX..
PARTICIPENT
OF THE
SECURITY
MARKET
INVESTOR IN
ISSURE OF THE INTERMEDIARI
THE
SECURITIES ES
SECURITUES
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In simple term Issuer is mainly the borrower of the fund like corporate and govt, investor is
the lender of the fund who accept risk to get return and the intermediaries, such as
merchant bankers, brokers etc and above them the governing body who govern the entire
market to protect the interest of all.
The Securities and Exchange Board of India (SEBI), provide a trading platform, where
buyers and sellers can meet to transact in securities that is called stock exchange basically
there are two major stock exchange in India they are-
• NSE
• BSE
Apart from these two there are 22 regional stock exchange in India that are spared all over
India
• Ensuring equal access to all investors all over the country through an appropriate
communication network,
• Providing a fair, efficient and transparent securities market using electronic trading
system,
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The Exchange has played a leading role as a change agent in transforming the
Indian Capital Markets to its present form. NSE has set up infrastructure that serves as a
role model for the securities industry in terms of trading systems, clearing and settlement
practices and procedures. The standards set by NSE in terms of market practices, products,
technology and service standards have become industry benchmarks and are being
replicated by other market participants. It provides screen-based automated trading system
with a high degree of transparency and equal access to investors irrespective of
geographical location.
Right from its inception, the exchange has adopted the purest form
of demutualised set up whereby the ownership, management and trading
rights are in the hands of three different sets of people. This has completely
eliminated any conflict of interest and helped NSE to aggressively pursue
policies and practices within a public interest framework
NEAT SYSTEM
The NEAT system supports an order driven market, wherein orders match on
the basis of price and time priority. All quantity fields are in units and prices
are quoted in Indian Rupees. The regular lot size and tick size for various
securities traded is notified by the Exchange from time to time.
Primary market-
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some obligation. The issuers create and issue fresh securities in exchange of funds through
public issues and/or as private placement.
Secondary market-
Secondary market is the place for sale and purchase of existing securities. It enables an
investor to adjust his holdings of securities in response to changes in his assessment about
risk and return. It also enables him to sell securities for cash to meet his liquidity needs. It
essentially comprises of the stock exchanges which provide platform for trading of
securities and a host of intermediaries who assist in trading of securities and clearing and
settlement of trades.
Transaction cycle
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Trade
Placing Order
Execution
Decision to Clearing of
Trade Trades
Funds/ Settlement
Securities of Trades
• Business risk,
• Financial risk (leverage),
• Liquidity risk,
• Exchange rate risk, and
• Country (political) risk
Business risk
Business risk is the uncertainty of income flows caused by the nature of a firm’s business.
The less certain the income flows of the firm, the less certain the income flows to the
investor. Therefore, the investor will demand a risk premium that is based on the
uncertainty caused by the basic business of the firm. As an example, a retail food company
would typically experience stable sales and earnings growth over time and would have low
business risk compared to a firm in the auto industry, where sales and earnings fluctuate
substantially over the business cycle, implying high business risk.
Financial risk
Financial risk is the uncertainty introduced by the method by which the firm finances its
investments. If a firm uses only common stock to finance investments, it incurs only
business risk. If a firm borrows money to finance investments, it must pay fixed financing
charges (in the form of interest to creditors) prior to providing income to the common
stockholders, so the uncertainty of returns to the equity investor increases. This increase in
uncertainty because of fixed-cost financing is called financial risk or financial leverage and
causes an increase in the stock’s risk premium.
Liquidity risk
Liquidity risk is the uncertainty introduced by the secondary market for an investment.
When an investor acquires an asset, he or she expects that the investment will mature (as
with a bond) or that it will be salable to someone else. In either case, the investor expects to
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be able to convert the security into cash and use the proceeds for current consumption or
other investments.
The more difficult it is to make this conversion, the greater the liquidity risk. An investor
must consider two questions when assessing the liquidity risk of an investment:
(1) How long will it take to convert the investment into cash?
(2) How certain is the price to be received? Similar uncertainty faces an investor who
wants to acquire an asset: How long will it take to acquire the asset? How uncertain is the
price to be paid?
Exchange rate risk is the uncertainty of returns to an investor who acquires securities
denominated in a currency different from his or her own. The likelihood of incurring this
risk is becoming greater as investors buy and sell assets around the world, as opposed to
only assets within their own countries. A U.S. investor who buys Japanese stock
denominated in yen must consider not only the uncertainty of the return in yen but also any
change in the exchange value of the yen relative to the U.S. dollar. That is, in addition to the
foreign firm’s business and financial risk and the security’s liquidity risk, the investor must
consider the additional uncertainty of the return on this Japanese stock when it is
converted from yen to U.S. dollars.
Country risk
Country risk, also called political risk, is the uncertainty of returns caused by the
possibility of a major change in the political or economic environment of a country. The
United States is acknowledged to have the smallest country risk in the world because its
political and economic systems are the most stable
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Low risk
Moderate risk High risk
SML
Expected
Return
Expected risk
Type of risk
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Type of Risk
Systematic Risk
Refers to that portion of total variability (/risk) in return caused by factors affecting the
prices of all securities. Economic, political, and sociological changes are the main sources of
systematic risk. Though it affects all the securities in the market, the extend to which it
affects a security will vary from one security to another. Systematic risk can not be
diversified.
Unsystematic risk
Unsystematic Risk refers to that portion of total risk that is unique or peculiar to a firm or
an industry, above and beyond that affecting securities markets in general. Factors like
consumer preferences, labor strikes, management capability etc. cause unsystematic risk
(/variability of returns) for a company’s stock. Unlike systematic risk, the unsystematic risk
can be reduced /avoided through diversification. Total risk of a fully diversified portfolio
equals to the market risk of the portfolio as its specific risk becomes zero.
What is a Portfolio?
A Portfolio is a combination of different investment assets mixed and matched for the
purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio
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can include any asset you own-from shares, debentures, bonds, mutual fund units to items
such as gold, art and even real estate etc. However, for most investors a portfolio has come
to signify an investment in financial instruments like shares, debentures, fixed deposits,
mutual fund units.
The process of managing an investment portfolio never stops. Once the funds are initially
invested according to the plan, the real work begins in monitoring and updating the status
of the portfolio and the investor’s needs
• Policy Statement
Focus: Investor's short-term and long-term needs, familiarity with capital market
history, and expectations
By constructing the portfolio focus: Meet the investor's needs at minimum risk levels
• Feedback Loop:
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Policy
Statemen Investment
t strategy
Continual Construct
monitorin the
g portfolio
Risk Diversification
Diversification can be understood as” not putting all your eggs in one basket”
For example if you are having only one stock that is technology and if some major events
affect technology then you face the heavy loss of technology stock
So their should be the proper tradeoff in your portfolio
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Fundamental
Analysis
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Introduction
Investor always looks for better way to select the securities. there are two type of data
analysis techniques that are available to assist investor to make better investment decision-
1- FUNDAMENTAL ANALYSIS
2- TECHNICAL ANALYSIS
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Fundamental Analysis: How Does It Work?
Fundamental analysis is carried out with the aim of predicting the future performance of a
company. It is based on the theory that the market price of a security tends to move
towards its “real value” or “intrinsic value.” Thus, the intrinsic value of a security being
higher than the security’s market value represents a time to buy. If the value of the security
is lower than its market price, investors should sell it.
• to conduct a company stock valuation and predict its probable price evolution,
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Fundamental Analysis
Fundamental analysis
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Approach of Fundamental Analysis
There are two basic approach of fundamental analysis but the objective of the both is same
to determine the company intrinsic value or real value
Beginning with the broad overview and working down to a specific stock pick. Here the
analyst begins at top, assesses the economic climate from an investment perspective, select
an industry that is well performed in the current economy and then select individual firms
within that industry that would best performed in the current economy.
The final step in macro analysis would be to analyze the major U.S. stock indexes such as
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the S&P 500 and NASDAQ. Both fundamental and technical analysis can be used as
barometers to determine the health of the indexes. The fundamentals of the market can be
determined by such ratios as price-to-earnings, price-to-sales and dividend yields. By
comparing the numbers to past readings, it can help determine whether the market is at a
level that is historically overbought or oversold. Technical analysis will help ascertain
where the market is in relation to the long-term cycle. Use charts that show the past several
decades and zone down the time horizon to a daily view. For example, indicators such as
the 50-day and 200-day moving averages are used to help us find the current trend of the
market and whether it is appropriate for investors to be invested heavily in equities.
Bottom-up approach-
Economic Analysis
Economic analysis shows that weather the economic climate offer a positive and
encouraging investing environment or not.
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• gross domestic product (GDP) growth rate
• exchange rate
• balance of payment (BOP)
• the current account deficit
• government policy( fiscal and monetary policy)
• Domestic legislation
• Unemployment rate
• Public attitude or confidence
• Inflation
• Interest rate
• Productivity
• Capacity utilization by the firm etc.
GDP
consolidated report on the performance of the economy . the period after 1990 witness the
sudden increment growth of the Indian economy in the form of average growth rate upto
4.5% to 5%. It shows investor the future prospects of the investor
INFLATION
The general increase in price of the goods and services . like excess inflation undermines
consumer spending power (price increases) so can cause economic stagnation. And also the
deflation can also hurt the economy because it encourage the consumer to postpone the
spending
Exchange rate
BOP
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• Capital account- account for the cross border transaction in financial assets
BOP can also face some deficit like
• Current account deficit- import is greater then export
• Capital account deficit- investment made in the country by foreign player is lesser
then the investment in foreign country made by local player
• So the conclusion is that the currency of country appreciate when their more
foreign currency inflow in the economy.
Interest rate
The cost of borrowing money in the economy and the amount of money circulating in the
economy , an increase in money supply causes the interest rate to fall , and decrease in the
money supply increase in the interest rate. If the interest rate are low the cost of borrowing
by businesses is not expensive and they can easily borrow to expend and develop their
activity
In a very broad term that share price will be high when interest rate decline
• Expansionary trend
• Recessionary trend
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Type of business cycle
• Trough- when business cycle reaches its low point and it represent end of
recession and beginning if expansion
• Peaks - when business cycle reaches its high point and it represent end of
expansion and beginning if recession
Peaks
Trough
Leading indicator
Tend to precede the upward and downward of the business cycle and can be use to predict
the near term activity of the economy so they can help to anticipate the cortporate profit
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and possible stock market price increase.for eg. Average weekly hours of production
workers.
Coincident indicators
Mirror of the movements of the business cycle. they tend to change directly with the
economy .for eg .industrial production.
Lagging indicator-
Indicator that changes after the economy has already begun to follow a particular pattern
or trend. For e.g. - ratio of trade inventories to sale
Industry analysis
After the economy has analyzed the next step of fundamental analysis is industrial analysis.
• industry structure
• overall growth rate
• market size
• competition
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• supply demand relationship
• product quality and cost element
• govt regulation
• business cycle
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Industry lifecycle
Pioneering
Stage
Expansion
Stage
Stabilization
Stage
Pioneering Stage
Initial stage where rapid growth in demand occurs. Number of growing company
fall in this stage as result strong competition pressure
Expansion Stage
Low and moderate risk during this stage industry improve their and sometime lower
their price. As the industry prospect grown and risk moderate, the number of
investor increase and later of this stage they start distributing dividend
Stabilization Stage
Growth became moderate and product become less innovative and more
standardized , market become full of competition etc
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Company Analysis
Under this head assesses will consider the following points-
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• Business and financial risk
• Financial statement analysis
• Business plan
• Management
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• comparing the firm’s performance with that of other firms in the same industry
• evaluating trends in the firm’s financial position over time
Balance Sheet
The Balance sheet shows the financial position of the firm at a particular point of time
I. Sources of Funds
1. Shareholders’ Funds
(a) Share Capital
(b) Reserves & surplus
2. Loan Funds
(a) Secured loans
(b) Unsecured loans
Ratio Analysis
Liquidity ratios
Liquidity refers to the ability of a firm to meet its financial obligations in the Short-term
which is less than a year? Certain ratios which indicate the liquidity of a firm are:
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(i) Current Ratio,
(ii) Acid Test Ratio,
(iii) Turnover Ratios.
It is based upon the relationship between current assets and current liabilities
Long term financial strength or soundness of a firm is measured in terms of its ability to
pay interest regularly or repay principal on due dates or at the time of maturity. Such long
term solvency of a firm can be judged by using leverage or capital structure ratios.
1-the ratios based on the relationship between borrowed funds and owner’s
capital which are computed from the balance sheet. Some such ratios are:
• Debt to Equity
• Debt to Asset ratios.
2-set of ratios which are calculated from Profit and Loss Account are:
• The interest coverage ratio and
• debt service coverage ratio are coverage ratio for leverage risk.
Profitability ratios
EPS measures the profit available to the equity shareholders per share, that is, the amount
that they can get on every share held. It is calculated by dividing the profits available to the
shareholders by number of outstanding shares. The profits available to the ordinary
shareholders are arrived at by net profits after taxes and preference dividend.
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Weather the security is valued properly or not with the aim to “capitalized on perceived
discrepancies”
The actual value of a security, as opposed to its market price or book value. The
intrinsic value includes other variables such as brand name, trademarks, and
copyrights that are often difficult to calculate and sometimes not accurately reflected in
the market price. One way to look at it is that the market capitalization is the price (i.e.
what investors are willing to pay for the company) and intrinsic value is the value (i.e. what
the company is really worth).
• Under valued
• Overvalued
• Equilibrium
In short we can say that investor can make use of the valuation gap between the intrinsic
value and market value of stock and reap the capital gain when price correction takes place
in the market in long run.
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Fundamental Analysis Tools
These are the most popular tools of fundamental analysis. They focus on earnings, growth, and value in the market
• Industry and company specific- all valuation model can work different for
different industry so the judgment may be wrong e.g.- service v/s
manufacturing industry
• Analyst bias
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CURRENT FACT AND FINDING THAT HELP IN
FUNDAMENTAL ANALYSIS
Large, dynamic and steadily expanding, the Indian economy is characterized by a huge
workforce operating in many new sectors of opportunity.
Agriculture, services and manufacturing industries all contribute to the development of the
Indian economy. The IT outsourcing, software and call center/ BPO industries in particular
have helped propel Indian economic development in recent years.
Definition: This entry gives GDP growth on an annual basis adjusted for inflation
and expressed as a percent. Source: CIA World Factbook - Unless otherwise noted,
information in this page is accurate as of December 18, 2008
53
GDP on purchasing power parity
Definition of GDP - per capita (PPP): This entry shows GDP on a purchasing power
parity basis divided by population as of 1 July for the same year.
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CUMULATIVE FDI EQUITY INFLOWS
Cumulative amount of FDI inflows (From April 2000 to March 2008) 270100 62,509
Amount of FDI inflows during 2008-09 (From April 2008 to January 2009) 105,673 23, 885
Policy Rate
Repo rate 4.75%
Reverse repo rate 3.25%
Bank Rate 6%
Reserve Ratios
CRR 5%
SLR 24%
EXCHANGE RATE
INR / 1 USD : 48.8900
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Foreign Exchange Reserves: 2008-09
During 2008-09, there was a decline in foreign exchange reserves. The variation in the main
components of foreign exchange reserves during 2008-09 are set out in Table 1.
Inflation Rate
In India, year-on-year change in wholesale price index (WPI) is used as the measure of
inflation. Chart 1 depicts the seasonally-adjusted month-on-month annualized percentage
change of the WPI using what is called the “X-12” method. It shows that we had a
deflationary phase during Ocober 2008–March 2009 which is over and we have inflation
now hovering around just below 5 per cent.
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Chart 1: WPI Inflation
(Month-on-month annualized % change)
• Infosys Technologies
• Oil and Natural Gas Corporation
• ICICI Bank
57
• Reliance Industries
• Steel Authority of India
• State Bank of India
• Tata Consultancy Services
• Indian Oil Corporation
• Tata Steel
• National Thermal Power Corporation
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Technica
Introduction
Technicians (sometimes called chartists) are only interested in the price movements in the
market. Despite all the fancy and exotic tools it employs, technical analysis really just
studies supply and demand in a market in an attempt to determine what direction,
or trend, will continue in the future. In other words, technical analysis attempts to
understand the emotions in the market by studying the market itself, as opposed to its
components. If you understand the benefits and limitations of technical analysis, it can give
you a new set of tools or skills that will enable you to be a better trader or investor.
Just as there are many investment styles on the fundamental side, there are also many
different types of technical traders. Some rely on chart patterns, others use
technical indicators and oscillators, and most use some combination of the two. In any case,
technical analysts' exclusive use of historical price and volume data is what separates them
from their fundamental counterparts. Unlike fundamental analysts, technical analysts don't
care whether a stock is undervalued - the only thing that matters is a security's past trading
data and what information this data can provide about where the security might move in
the future.
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Objective of study
60
Assumptions
The market
Price moves in History tends to
discounts
trends repeat itself
everything
61
Not Just for Stocks
Technical analysis can be used on any security with historical trading data. This includes
stocks, futures and commodities, fixed-income securities, forex, etc. In this tutorial, we'll
usually analyze stocks in our examples, but keep in mind that these concepts can be applied
to any type of security. In fact, technical analysis is more frequently associated with
commodities and forex, where the participants are predominantly traders
Tools
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• The general definition of the term - a trend is really nothing more than the general
direction in which a security or market is headed. .
Types of Trend
Trends
Direction Length
PRIMARY OR LONG
UP-TREND
TERM
DOWN-TREND INTERMEDIARIES
SIDEWAYS OR
SHORT-TERM
HORIZONTAL
• Up trends-
o Series of higher highs and higher lows,
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o When each successive peak and trough is higher, it's referred to as an
upward trend.
• Downtrends-
o Lower lows and lower highs..
o If the peaks and troughs are getting lower, it's a downtrend.
• Sideways/Horizontal Trend-
o When there is little movement up or down in the peaks and troughs, it's a
sideways or horizontal trend.
Point 2 in the chart is the first high, which is determined after the price falls from this
point. Point 3 is the low that is established as the price falls from the high. For this to
remain an up-Trend each successive low must not fall below the previous lowest point or
the trend is deemed a reversal.
A long-term trend is composed of several intermediate trends, which often move against the
direction of the major trend. If the major trend is upward and there is a downward
correction in price movement followed by a continuation of the uptrend, the correction is
considered to be an intermediate trend. The short-term trends are components of both
major and intermediate trends.
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\
Trend lines
A trend line is a simple charting technique that adds a line to a chart to represent the trend
in the market or a stock. Drawing a trend line is as simple as drawing a straight line that
follows a general trend. These lines are used to clearly show the trend and are also used in
the identification of trend reversals.
Channels
A channel, or channel lines, is the addition of two parallel trendlines that act as strong
areas of support and resistance. The upper trendline connects a series of highs, while the
lower trendline connects a series of lows. A channel can
slope upward, downward or sideways but, regardless of the direction, the interpretation
remains the same. Traders will expect a given security to trade between the two levels of
support and resistance until it breaks beyond one of the levels, in which case traders can
expect a sharp move in the direction of the break. Along with clearly displaying the trend,
channels are mainly used to illustrate important areas of support and resistance.
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Support and resistance
Once you understand the concept of a trend, the next major concept is that of support and
resistance. You'll often hear technical analysts talk about the ongoing battle between
the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). This
is revealed by the prices a security seldom moves above (resistance) or below (support).
Figure 1
As you can see in Figure 1, support is the price level through which a stock or market
seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price level
that a stock or market seldom surpasses (illustrated by the red arrows).
What is Volume?
Volume is simply the number of shares or contracts that trade over a given period of time,
usually a day. The higher the volume, the more active the security. To determine the
movement of the volume (up or down), chartists look at the volume bars that can usually be
found at the bottom of any chart
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Why Volume is Important ?
Volume is an important aspect of technical analysis because it is used to confirm trends and
chart patterns. Any price movement up or down with relatively high volume is seen as a
stronger, more relevant move than a similar move with weak volume. Therefore, if you are
looking at a large price movement, you should also examine the volume to see whether it
tells the same story.
Figure 1
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Chart Properties
There are several things that you should be aware of when looking at a chart, as these
factors can affect the information that is provided. They include the time scale, the price
scale and the price point properties used.
Chart
Properties
Price point
The time scale The price scale properties
used.
The time scale refers to the range of dates at the bottom of the chart, which can vary from
decades to seconds
The price scale is on the right-hand side of the chart. It shows a stock's current price and
compares it to past data points. This may seem like a simple concept in that the price scale
goes from lower prices to higher prices as you move along the scale from the bottom to the
top.
• linear (arithmetic) or
• Logarithmic way.
If a price scale is constructed using a linear scale, the space between each price point
(10, 20, 30, 40) is separated by an equal amount. A price move from 10 to 20 on a
linear scale is the same distance on the chart as a move from 40 to 50. In other
words, the price scale measures moves in absolute terms and does not show the
effects of percent change.
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Figure 2
If a price scale is in logarithmic terms, then the distance between points will be equal in
terms of percent change. A price change from 10 to 20 is a 100% increase in the price while
a move from 40 to 50 is only a 25% change, even though they are represented by the same
distance on a linear scale. On a logarithmic scale, the distance of the 100% price change
from 10 to 20 will not be the same as the 25% change from 40 to 50. In this case, the move
from 10 to 20 is represented by a larger space one the chart, while the move from 40 to 50,
is represented by a smaller space because, percentage-wise, it indicates a smaller move. In
Figure 2, the logarithmic price scale on the right leaves the same amount of space between
10 and 20 as it does between 20 and 40 because these both represent 100% increases.
Chart Types
There are four main types of charts that are used by investors and traders depending on
the information that they are seeking and their individual skill levels. The chart types are:
the line chart, the bar chart, the candlestick chart and the point and figure chart.
Chart Types
The candlestick
The line chart The bar chart chart
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Line Chart
The most basic of the four charts is the line chart because it represents only the closing
prices over a set period of time. The line is formed by connecting the closing prices over the
time frame. Line charts do not provide visual information of the trading range for the
individual points such as the high, low and opening prices. However, the closing price is
often considered to be the most important price in stock data compared to the high and low
for the day and this is why it is the only value used in line charts.
Bar Charts
The bar chart expands on the line chart by adding several more key pieces of information
to each data point. The chart is made up of a series of vertical lines that represent each data
point. This vertical line represents the high and low for the trading period, along with the
closing price. The close and open are represented on the vertical line by a horizontal dash.
The opening price on a bar chart is illustrated by the dash that is located on the left side of
the vertical bar. Conversely, the close is represented by the dash on the right. Generally, if
the left dash (open) is lower than the right dash (close) then the bar will be shaded black,
representing an up period for the stock, which means it has gained value. A bar that is
colored red signals that the stock has gone down in value over that period. When this is the
case, the dash on the right (close) is lower than the dash on the left (open).
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Candlestick Charts
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually
constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing
the period's trading range. The difference comes in the formation of a wide bar on the
vertical line, which illustrates the difference between the open and close. And, like bar
charts, candlesticks also rely heavily on the use of colors to explain what has happened
during the trading period. A major problem with the candlestick color configuration,
however, is that different sites use different standards; therefore, it is important to
understand the candlestick configuration used at the chart site you are working with. There
are two color constructs for days up and one for days that the price falls. When the price of
the stock is up and closes above the opening trade, the candlestick will usually be white or
clear. If the stock has traded down for the period, then the candlestick will usually be red or
black, depending on the site. If the stock's price has closed above the previous day’s close
but below the day's open, the candlestick will be black or filled with the color that is used to
indicate an up day.
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Chart Patterns
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a
sign of future price movements. Chartists use these patterns to identify current trends and
trend reversals and to trigger buy and sell signals.
• reversal
• continuation
A reversal pattern signals that a prior trend will reverse upon completion of the pattern. It
include
A continuation pattern, on the other hand, signals that a trend will continue once the
pattern is complete. These patterns can be found over charts of any timeframe. In this
section, we will review some of the more popular chart patterns.
• This is one of the most popular and reliable chart patterns in technical analysis.
• Head and shoulders is a reversal chart pattern that when formed, signals that the
security is likely to move against the previous trend.
• As you can see in Figure 1, there are two versions of the head and shoulders chart
pattern. Head and shoulders top (shown on the left) is a chart pattern that is formed
at the high of an upward movement and signals that the upward trend is about to
end.
• Head and shoulders bottom, also known as inverse head and shoulders (shown on
the right) is the lesser known of the two, but is used to signal a reversal in a
downtrend.
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Figure 1: Head and shoulders top is shown on the left. Head and shoulders
bottom, or inverse head and shoulders, is on the right.
• two shoulders,
• a head and
• A Neck line
Also, each individual head and shoulder is comprised of a high and a low. For example,
in the head and shoulders top image shown on the left side in Figure 1, the left shoulder
is made up of a high followed by a low. In this pattern, the neckline is a level of support
or resistance. Remember that an upward trend is a period of successive rising highs and
rising lows. The head and shoulders chart pattern, therefore, illustrates a weakening in
a trend by showing the deterioration in the successive movements of the highs and lows.
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Cup and Handle
• the upward trend has paused but will continue in an upward direction once the
pattern is confirmed.
Figure 2
As you can see in Figure 2, this price pattern forms what looks like a cup, which is preceded
by an upward trend.
• The handle follows the cup formation and is formed by a generally
downward/sideways movement in the security's price. Once the price movement
pushes above the resistance lines formed in the handle, the upward trend can
continue. There is a wide ranging time frame for this type of pattern, with the span
ranging from several months to more than a year.
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Figure 3: A double top pattern is shown on the left, while a double bottom pattern is
shown on the right.
•
In the case of the double top pattern in Figure 3, the price movement has twice tried to
move above a certain price level. After two unsuccessful attempts at pushing the price
higher, the trend reverses and the price heads lower. In the case of a double
bottom (shown on the right), the price movement has tried to go lower twice, but has
found support each time. After the second bounce off of the support, the security enters
a new trend and heads upward.
Triangles
Triangles are some of the most well-known chart patterns used in technical analysis.
The three types of triangles, which vary in construct and implication, are
• Ascending and
• Descending triangle.
These chart patterns are considered to last anywhere from a couple of weeks to several
months.
Figure 4
The symmetrical triangle in Figure 4 is a pattern in which two trendlines converge toward
each other. This pattern is neutral in that a breakout to the upside or downside is a
confirmation of a trend in that direction. In an ascending triangle, the upper trendline is
flat, while the bottom trendline is upward sloping. This is generally thought of as a bullish
pattern in which chartists look for an upside breakout. In a descending triangle, the lower
trendline is flat and the upper trendline is descending. This is generally seen as a bearish
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pattern where chartists look for a downside breakout.
These two short-term chart patterns are continuation patterns that are formed when there
is a sharp price movement followed by a generally sideways price movement. This pattern
is then completed upon another sharp price movement in the same direction as the move
that started the trend. The patterns are generally thought to last from one to three weeks.
Figure 5
As you can see in Figure 5, there is little difference between a pennant and a flag. The main
difference between these price movements can be seen in the middle section of the chart
pattern. In a pennant, the middle section is characterized by converging trendlines, much
like what is seen in a symmetrical triangle. The middle section on the flag pattern, on the
other hand, shows a channel pattern, with no convergence between the trendlines. In both
cases, the trend is expected to continue when the price moves above the upper trendline.
Wedge
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a
symmetrical triangle except that the wedge pattern slants in an upward or downward
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direction, while the symmetrical triangle generally shows a sideways movement. The other
difference is that wedges tend to form over longer periods, usually between three and six
months.
Figure 6
The fact that wedges are classified as both continuation and reversal patterns can make
reading signals confusing. However, at the most basic level, a falling wedge is bullish and a
rising wedge is bearish. In Figure 6, we have a falling wedge in which two trendlines are
converging in a downward direction. If the price was to rise above the upper trendline, it
would form a continuation pattern, while a move below the lower trendline would signal a
reversal pattern.
Gaps
A gap in a chart is an empty space between a trading period and the following trading
period. This occurs when there is a large difference in prices between two sequential
trading periods. For example, if the trading range in one period is between $25 and $30 and
the next trading period opens at $40, there will be a large gap on the chart between these
two periods. Gap price movements can be found on bar charts and candlestick charts but
will not be found on point and figure or basic line charts. Gaps generally show that
something of significance has happened in the security, such as a better-than-expected
earnings announcement.
There are three main types of gaps, breakaway, runaway (measuring) and exhaustion. A
breakaway gap forms at the start of a trend, a runaway gap forms during the middle of a
trend and an exhaustion gap forms near the end of a trend. (For more insight, read Playing
The Gap.)
Triple tops and triple bottoms are another type of reversal chart pattern in chart analysis.
These are not as prevalent in charts as head and shoulders and double tops and bottoms,
but they act in a similar fashion. These two chart patterns are formed when the price
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movement tests a level of support or resistance three times and is unable to break through;
this signals a reversal of the prior trend.
Figure 7
Confusion can form with triple tops and bottoms during the formation of the pattern
because they can look similar to other chart patterns. After the first two support/resistance
tests are formed in the price movement, the pattern will look like a double top or bottom,
which could lead a chartist to enter a reversal position too soon.
Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that
signals a shift from a downward trend to an upward trend. This pattern is traditionally
thought to last anywhere from several months to several years.
Figure 8
A rounding bottom chart pattern looks similar to a cup and handle pattern but without the
handle. The long-term nature of this pattern and the lack of a confirmation trigger, such as
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the handle in the cup and handle, makes it a difficult pattern to trade.
We have finished our look at some of the more popular chart patterns. You should now be
able to recognize each chart pattern as well the signal it can form for chartists. We will now
move on to other technical techniques and examine how they are used by technical traders
to gauge price movements.
Types of indicators
• Leading and
• Lagging
A leading indicator precedes price movements, giving them a predictive quality, A leading
indicator is thought to be the strongest during periods of sideways or non-trending trading
ranges,
A lagging indicator is a confirmation tool because it follows price movement. the lagging
indicators are still useful during trending periods.
Indicators are used to form buy and sell signals in technical analysis
The two main ways that indicators are used to form buy and sell signals in technical
analysis is through
• crossovers
• Divergence.
Crossovers are the most popular and are reflected when either the price moves through the
moving average, or when two different moving averages cross over each other. The second
way indicators are used is through divergence, which happens when the direction of the
price trend and the direction of the indicator trend are moving in the opposite direction.
This signals to indicator users that the direction of the price trend is weakening.
Accumulation/Distribution Line
The accumulation/distribution line is one of the more popular volume indicators that
measures money flows in a security. This indicator attempts to measure the ratio of buying
to selling by comparing the price movement of a period to the volume of that period.
Calculated:
This is a non-bounded indicator that simply keeps a running sum over the period of the
security. Traders look for trends in this indicator to gain insight on the amount of
purchasing compared to selling of a security. If a security has an
accumulation/distribution line that is trending upward, it is a sign that there is more
buying than selling
The ADX is a combination of two price movement measures: the positive directional
indicator (+DI) and the negative directional indicator (-DI). The ADX measures the
strength of a trend but not the direction. The +DI measures the strength of the upward
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trend while the -DI measures the strength of the downward trend. These two measures
are also plotted along with the ADX line. Measured on a scale between zero and 100,
readings below 20 signal a weak trend while readings above 40 signal a strong trend.
Aroon
The Aroon indicator is a relatively new technical indicator that was created in 1995. The
Aroon is a trending indicator used to measure whether a security is in an uptrend or
downtrend and the magnitude of that trend. The indicator is also used to predict when a
new trend is beginning.
The indicator is comprised of two lines, an "Aroon up" line (blue line) and an "Aroon
down" line (red dotted line). The Aroon up line measures the amount of time it has been
since the highest price during the time period. The Aroon down line, on the other hand,
measures the amount of time since the lowest price during the time period. The number of
periods that are used in the calculation is dependent on the time frame that the user wants
to analyze.
Aroon Oscillator
An expansion of the Aroon is the Aroon oscillator, which simply plots the difference
between the Aroon up and down lines by subtracting the two lines. This line is then
plotted between a range of -100 and 100. The centerline at zero in the oscillator is
considered to be a major signal line determining the trend. The higher the value of the
oscillator from the centerline point, the more upward strength there is in the security;
the lower the oscillator's value is from the centerline, the more downward pressure. A
trend reversal is signaled when the oscillator crosses through the centerline. For
example, when the oscillator goes from positive to negative, a downward trend is
confirmed. Divergence is also used in the oscillator to predict trend reversals. A reversal
warning is formed when the oscillator and the price trend are moving in an opposite
direction.
The Aroon lines and Aroon oscillators are fairly simple concepts to understand but yield
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powerful information about trends. This is another great indicator to add to any
technical trader's arsenal
The moving average convergence divergence (MACD) is one of the most well known and
used indicators in technical analysis. This indicator is comprised of two exponential moving
averages, which help to measure momentum in the security. The MACD is simply the
difference between these two moving averages plotted against a centerline. The centerline is
the point at which the two moving averages are equal. Along with the MACD and the
centerline, an exponential moving average of the MACD itself is plotted on the chart. The
idea behind this momentum indicator is to measure short-term momentum compared to
longer term momentum to help signal the current direction of momentum.
When the MACD is positive, it signals that the shorter term moving average is above
the longer term moving average and suggests upward momentum. The opposite holds
true when the MACD is negative - this signals that the shorter term is below the longer
and suggest downward momentum. When the MACD line crosses over the centerline, it
signals a crossing in the moving averages. The most common moving average values
used in the calculation are the 26-day and 12-day exponential moving averages. The
signal line is commonly created by using a nine-day exponential moving average of the
MACD values. These values can be adjusted to meet the needs of the technician and the
security. For more volatile securities, shorter term averages are used while less volatile
securities should have longer averages.
Another aspect to the MACD indicator that is often found on charts is the
MACD histogram. The histogram is plotted on the centerline and represented by bars.
Each bar is the difference between the MACD and the signal line or, in most cases, the
nine-day exponential moving average. The higher the bars are in either direction, the
more momentum behind the direction in which the bars point
one of the most common buy signals is generated when the MACD crosses above the signal
line (blue dotted line), while sell signals often occur when the MACD crosses below the
signal.
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Relative Strength Index
The relative strength index (RSI) is another one of the most used and well-known
momentum indicators in technical analysis. RSI helps to signal overbought and oversold
conditions in a security. The indicator is plotted in a range between zero and 100. A reading
above 70 is used to suggest that a security is overbought, while a reading below 30 is used to
suggest that it is oversold. This indicator helps traders to identify whether a security’s price
has been unreasonably pushed to current levels and whether a reversal may be on the way.
Figure 3
The standard calculation for RSI uses 14 trading days as the basis, which can be
adjusted to meet the needs of the user. If the trading period is adjusted to use fewer
days, the RSI will be more volatile and will be used for shorter term trades.
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On-Balance Volume
The on-balance volume (OBV) indicator is a well-known technical indicator that reflect
movements in volume. It is also one of the simplest volume indicators to compute and
understand.
The OBV is calculated by taking the total volume for the trading period and assigning it
a positive or negative value depending on whether the price is up or down during the
trading period. When price is up during the trading period, the volume is assigned a
positive value, while a negative value is assigned when the price is down for the period.
The positive or negative volume total for the period is then added to a total that is
accumulated from the start of the measure.
Stochastic Oscillator
The stochastic oscillator is one of the most recognized momentum indicators used in
technical analysis. The idea behind this indicator is that in an uptrend, the price should
be closing near the highs of the trading range, signaling upward momentum in the
security. In downtrends, the price should be closing near the lows of the trading range,
signaling downward momentum.
Moving Averages
Most chart patterns show a lot of variation in price movement. This can make it
difficult for traders to get an idea of a security's overall trend. One simple method
traders use to combat this is to apply moving averages. A moving average is the average
price of a security over a set amount of time. By plotting a security's average price, the
price movement is smoothed out. Once the day-to-day fluctuations are removed, traders
are better able to identify the true trend and increase the probability that it will work in
their favor.
It simply takes the sum of all of the past closing prices over the time period and divides the
result by the number of prices used in the calculation. For example, in a 10-day moving
average, the last 10 closing prices are added together and then divided by 10.
Increasing the number of time periods in the calculation is one of the best ways to gauge the
strength of the long-term trend and the likelihood that it will reverse.
Many individuals argue that the usefulness of this type of average is limited because each
point in the data series has the same impact on the result regardless of where it occurs in
the sequence. The critics argue that the most recent data is more important and, therefore,
it should also have a higher weighting. This type of criticism has been one of the main
factors leading to the invention of other forms of moving averages
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This moving average calculation uses a smoothing factor to place a higher weight on recent
data points and is regarded as much more efficient than the linear weighted average.
Having an understanding of the calculation is not generally required for most traders
because most charting packages do the calculation for you. The most important thing to
remember about the exponential moving average is that it is more responsive to new
information relative to the simple moving average. This responsiveness is one of the key
factors of why this is the moving average of choice among many technical traders. As you
can see in Figure 2, a 15-period EMA rises and falls faster than a 15-period SMA. This
slight difference doesn’t seem like much, but it is an important factor to be aware of since it
can affect returns.
• Moving averages are used to identify current trends and trend reversals as well as to
set up support and resistance levels. \
• Moving averages can be used to quickly identify whether a security is moving in an
uptrend or a downtrend depending on the direction of the moving average
Figure 5
If the periods used in the calculation are relatively short, for example 15 and 35, this could
signal a short-term trend reversal. On the other hand, when two averages with relatively
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long time frames cross over (50 and 200, for example), this is used to suggest a long-term
shift in trend.
Recommendation
Short Term: Wait (May Break 52 week low)
Medium & Long Term: Accumulate
Based on Simple Moving Average
Interpretation
A- Short term & Medium term DM crossing 200 MA upward making long term
and strong upside signal
B- Short term & Medium term DM crossing 200 MA upward making long term and
strong upside signal
C- 20 days and 50 days moving avg both crossing downward over 200 days moving
average. It is giving bearish trend reversal signal
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Interpretation
20DMA making head and shoulder formation and breaking Neckline. Signaling
Trend Reversal
Interpretation
100 DMA giving a strict resistance, prices not able to break 100DMA.
In last Two occasions as prices touched 100 DMA, prices have seen lower
lows.
ICICI bank in Feb09 again has touched resistance level, so predict further
lows in this script.
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Based on Chart Pattern
Interpretation
Continuous Triangles are seen with lower highs & higher lows. Prices are converging, and
downward break out from the pattern giving short term bearish signal. Also volume also
increased, which confirms further decline.
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Research design and methodology
It was important to collect detailed information on various aspects for effective analysis. As
“Marketing today is becoming more of a battle based on information based society
companies with superior information enjoys a competitive advantage.
Methodology Adopted
Descriptive sampling
Analysis of Data
Data collection
The data collection was collected through secondary source.
SECONDARY DATA :
Secondary data was collected mainly from internet ,printed journals on the capital
markets of India ,newspaper articles and books written on the technical and
fundamental analysis
SAMPLING:
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References and Bibliography
Articles
• TECHNICAL ANALYSIS BY ADITYA KARACHU
Books
Websites
www.rbi.org
www.icicidirect.com
www.invest.hsbc.ca
www.nseindia.com
www.economicstimes.com
www.ichart.com
www.investopedia.com
www.google.com
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