Technical analysis
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This document provides an overview of technical analysis and various technical indicators used to analyze stock prices and generate buy/sell signals. It discusses technical analysis approaches like trend lines, support and resistance levels, chart patterns like head and shoulders and double tops/bottoms, and indicators such as moving averages, MACD, RSI, Bollinger Bands, pivot points, and money flow index. The goal of technical analysis is to forecast stock prices and market movements based on historical market data like price, volume, and open interest.
Technical analysis
- 1. Technical Analysis Presented by Dr.K.PRABHAKARAN MBA,M.Phil.,PGDMM,Ph.D. Faculty-Finance, RVS Faculty of Management,Coimbatore & SEBI Financial Education Resource Person Visiting Faculty- BSE Institute Ltd
- 2. Technical Analysis Technical analysis is the attempt to forecast stock prices on the basis of market-derived data. Technical analysts essentially search for bullish (positive) and bearish (negative) signals about stock prices or market direction.
- 3. Technical Analysis The technical analyst deal with only three pieces of data: price, trading volume, and open interest. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
- 4. Types of Charts Line Chart Candlestick Chart Bar Charts
- 5. Line Chart
- 6. Line chart Stock Price Declining Trend Channel Peak Buy Point Trough Rising Trend Channel Flat Trend Channel Sell Point Declining Trend Channel Trough Buy Point
- 7. Trend Lines There are three basic kinds of trends: An Up trend where prices are generally increasing. A Down trend where prices are generally decreasing. A Trading Range.
- 8. Support and Resistance Support level is a price level where the price tends to find support as it is going down
- 9. Support and Resistance Resistance Level is a price level where the price tends to find resistance as it is going up
- 10. Importance of Support and Resistance Support and resistance analysis is an important part of trends because it can be used to make trading decisions and identify when a trend is reversing
- 11. Head and Shoulders This formation is characterized by two small peaks on either side of a larger peak. This is a reversal pattern, meaning that it signifies a change in the trend. H&S Top Head H&S Bottom Head Left Shoulder Left Shoulder Right Shoulder Right Shoulder Neckline Neckline
- 12. Head & Shoulders Example Sell Signal Minimum Target Price Based on measurement rule
- 13. Double Tops and Bottoms These formations are similar to the H&S formations, but there is no head. These are reversal patterns with the same measuring implications as the H&S. Double Top Target Target Double Bottom
- 15. Rounded Tops & Bottoms Rounding formations are characterized by a slow reversal of trend. Rounding Bottom Rounding Top
- 16. 16 2.CANDLESTICK CHART High Upper Shadow Open Lower Shadow Low Bullish Bearish Body Close
- 17. 17 Candle Stick Charting Green is an example of a bullish pattern, the stock opened at (or near) its low and closed near its high Red is an example of a bearish pattern. The stock opened at (or near) its high and dropped substantially to close near its low
- 18. 18 Candle Stick Charting Top example is called a hammer and is a bullish pattern only if it occurs after the stock price has dropped for several days. Bottom is an example of a Doji.
- 21. 21 3.Bar Chart
- 22. Bar Chart This is a bar (open, high, low, close )
- 23. Example Double bottom Gap, should get filled Nov to Mar Trading range Descending triangles
- 24. Technical Indicators There are hundreds of technical indicators used to generate buy and sell signals. We will look at just a few Indicators Moving Average Moving Average Convergence/Divergence (MACD) Relative Strength Index (RSI) Bollinger Bands Pivot Point Money Flow Index
- 25. 25 Moving Average Calculated by applying a percentage of today's closing price to yesterday's moving average value. The most commonly used moving averages are of 10,20, 30, 50, 100 and 200 days. For example: a 10-day simple moving average is calculated by adding the closing prices for the last 10 days and dividing the total by 10.
- 26. Moving Average The Moving Average Technical Indicator shows the mean instrument price value for a certain period of time. There are four different types of moving averages: Simple moving averages Exponential moving averages Smoothed moving averages Linear Weighted moving averages
- 27. Exponential Moving Average 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. Formula:
- 29. Example for EMA
- 30. Moving Average Convergence/Divergence (MACD) MACD was developed by Gerald Appel as a way to keep track of a moving average crossover system. Appel defined MACD as the difference between a 12-day and 26-day moving average. A 9-day moving average of this difference is used to generate signals. When this signal line goes from negative to positive, a buy signal is generated. When the signal line goes from positive to negative, a sell signal is generated.
- 31. Moving Averages Convergence Divergence
- 33. Relative Strength Index (RSI) RSI was developed by Welles Wilder as an oscillator to measure overbought/oversold levels. RSI is a measure of the ratio of average price changes on up days to average price changes on down days. The most important thing to understand about RSI is that a level above 70 indicates a stock is overbought, and a level below 30 indicates that it is oversold (it can range from 0 to 100).
- 34. Relative Strength Index (RSI) The relative strength index (RSI) is one of the most used tools in Technical analysis. RSI helps to signal the overbought and oversold conditions in a security. Formula: 100 RSI = 100 -------- 1 + RS Average Gain First RS = ----------------- Average Loss Average Gain = Total Gains / n Average Loss = Total Loss / n
- 35. RSI Example Chart Overbought Oversold
- 36. RSI Example
- 37. Bollinger Bands Bollinger bands were created by John Bollinger (former FNN technical analyst, and regular guest on CNBC). Bollinger Bands are based on a moving average of the closing price. They are two standard deviations above and below the moving average. A buy signal is given when the stock price closes below the lower band, and a sell signal is given when the stock price closes above the upper band. When the bands contract, that is a signal that a big move is coming, but it is impossible to say if it will be up or down.
- 38. Bollinger Bands
- 40. MONEY FLOW INDEX (MFI) Money flow index was discovered by Created by Gene Quong and Avrum Soudack. Money flow is positive when the typical price rises. This is due to buying pressure. A ratio of positive and negative money flow is then plugged into an RSI formula to create an oscillator that moves between zero and one hundred.
- 41. FORMULA
- 42. MFI EXAMPLE MONEY FLOW INDEX 0 10 20 30 40 50 60 70 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 YEAR MFI MFI
- 43. Pivot Point A technical indicator derived by calculating the numerical average of particular share high, low and closing prices. The pivot point is used as a predictive indicator. If the following day’s market price falls below the pivot point, it may be used as a new support level. Support and resistance are price levels at which movements should stop and reverse direction.
- 44. Formula for Pivot Point Pivot Point (P) = (High + Low + Close) / 3 Support level 1(S1) = ((2*pivot point) – high)) Resistant level 1(R1) = ((2*pivot point) – low)) Support level 2(S2) = ((pivot point) – (R1-S1)) Resistant level 2(R2) = ((pivot point) + (R1-S1))