Portfolio Building Strategies based on Technical Analysis of Stock Prices

AKHIL SWAMI
Technical analysis

 Principle of technical analysis is that the

market narrates its story.
 Job is to identify the trend and when the
trend will move in the opposite direction.
What is technical analysis

 Technical analysis is the study of market action, primarily through the

use of charts, for the purpose of forecasting future price trends.

Basic premises of technical analysis

 Market action discounts everything

 Prices move in trends

 History repeats itself.

 Primary trend cannot be manipulated.
Ingredients of a Trading Plan

 Criteria for selection  System of booking

 Fundamental
Profits/Losses
 Technical
 Both
 Keeping an overall score –
 Know your capital at Risk
Net result is important and not
 Capital employed
few winners or few losers
 Risk in each trade
 Overall risk at any time
 Trend following methods
 Fundamental
 Technical
 Both
Basic Assumptions

Market value is determined solely by the interaction of

supply of and demand for the shares

Supply and demand for the shares is governed by many

rational and irrational factors

Basically demand and supply causes the change in trends

Share prices move in trend and persist for an applicable

length of time.

Shift
in demand and supply occurs gradually rather than
suddenly
Factors affecting Stock Prices

 Company Results  Monsoon

 Merger/De-merger news  Derivative Settlement
 Stock split/bonus/dividend
 Raw Material Prices
 War
 Court Cases
 FII Buying /Selling figures
 Terrorist attack
 MF Buying / Selling
 Change in rate of interest  Moving to trade to trade
 Inflation settlement
 Oil Prices  Suspension of trading
 Political Instability  Company Announcements
 US/Asian/European markets  News of Disinvestments by the
govt.
 Budget/Fiscal/Monetary Policy
 Epidemics / Tsunami /
 Metal Prices Earthquake
Some Tools of Technical Analysis

Patterns of price movements

Averages and Trend Lines

Candle stick methods

Gaps, Supports & Resistances

Elliot Wave Rules

Money Management Rules

 Know your capital at risk

Treat your entire capital as Risk Capital

Limit your gross exposure & exposure in single position

Maximum Risk at any point of time is 5% of the Capital

 Maximum no. of position

Diversify over five position, not too many, not too little
Chart construction

 Line chart

 Bar chart

 Candlestick chart

 Point and figure chart

 Candle volume chart

Line Chart

 Prices are plotted using closing prices. A closing price can be of any time frame.

 Sensex daily line chart

Bar Chart

 A bar represents four prices – open, high, low and close.

Copper daily bar chart

Candlestick

 Candlestick chart is similar to that of bar chart but gives clear

visual effect.

 It is made of hollow body, which represents open and close.

Line at the tip is called as ‘shadow’, represents high and low.
Daily Sensex
Wave
Opening of trade
Rounding Bottom
Moving average
 Basic concepts of trend

 It is the direction of peaks and troughs that constitutes market trend.

 
 Trend has three directions.

 Trend has three classifications.

Support and Resistance

 The troughs or reaction lows are called support. Resistance is the opposite of
support.

 Determining the significance of supports and resistance.

 How support and resistance reverse their roles

CNX IT Index daily chart– Support acts as resistance
The Importance of round numbers as support and resistance
J P Associates daily chart – 500 and 200 as resistance and
support
How to use trend lines
Federal Bank daily chart

 Once a trend assumes a certain

slope, as identified by the
trendline, it will usually maintain
the same slope

 The breaking of the trendline is

one of the best warnings of trend
reversal

 Measuring implication of
trendline

 Once breached, trend lines

reverse their roles
Major Reversal Price Patterns Continuation Price Patterns

 Head & Shoulders – Bearish  Triangles

 Symmetrical triangle
 Inverted Head & Shoulders –
Bearish
 Ascending triangle

 Double Top – Bearish  Descending triangle

 Double Bottom – Bullish  Flag

 Rising and falling Wedges

 Rounding Bottom- Bullish
Some common features of all reversal patterns

 Existence of prior trend.

 Break of important trend lines.

 Larger the pattern, greater the subsequent move.

 Topping patterns are usually shorter in duration and more volatile than bottoms.

 Bottoms usually have smaller price ranges and take longer to build.

 Volumes are more important for bullish patterns.

Head & Shoulders
Head & Shoulder
Inverted Head and Shoulders
PNB Gilts Daily Chart
Nifty Future 5 Minutes Chart
Double Top
Double Top
Kotak Bank Daily Chart
Double Bottom
Crude Oil Future Daily Chart
Ascending Triangle Descending Triangle
Mcdowell Daily chart
Flag
RNRL Daily Chart – Flag Breakout
Calls ………continue…
Putting it all together

 What is the direction of the overall market?

 What is the direction of the various market sectors?
 What are the weekly and monthly charts showing?
 Are the major, intermediate and minor trends up, down or sideways?
 Where are the important support and resistance levels?
 Where are the important trendlines?
 Where are the 61.8%, 50% and 38.2% Fibonacci retracement levels?
 Are there any price gaps and what type are they?
 Are there any major reversal patterns visible?
 Are there any continuation patterns visible?
 What are the price objectives from those patterns?
 Which way are the moving averages pointing?
 Are the oscillators overbought , oversold or neutral?
 Are any divergences apparent on the oscillators?
 Are there any candlestick reversal or continuation patterns?
Terms related to share Market

 Failed Signals--- When a market fails to

follow through in the direction of a chart
signal, it very strongly suggests the
possibility of a significant move in the
opposite direction.
 Bulls and Bear Traps---are major breakouts
that are soon followed by abrupt sharp price
reversals.
Some terms

 Dead Cat Bounce---A temporary recovery

from a prolonged decline or bear market ,
after which the market continues to fall.
 Blood Letting-----A period of severe investing
losses , The term comes from the old
medical practice that involved bleeding out a
patient.
Some terms

 Flight to quality----The action of investors

moving their capital away from riskier
investments to the safest investment vehicle.
 Capitulation---A military term , refers to
surrendering or giving up.
 Falling knife---When the shares have a free
fall-Don’t out your had below a falling knife.
Some terms

 Torpedo Stocks---A declining stock that will

most likely continue to decline.
 Air pocket Stock---When the price of a stock
plunges unexpectedly similar to airplane
when it hits a air pocket.
 Down Tick---A trade is on the down tick when
the last trade occurred at a price lower than
the previous one.
Hinder burg Omen

 When there are both new 52 weeks high and

52 weeks low, it indicates that the market is
going through a period of extreme
divergence and is not very conducive for
further rise,.
Some terms

 Lame Duck---is a bear who has made a short

sale but is unable to his commitment to
deliver the securities sold by him on account
of rises in prices of securities subsequently
to short sale ‘ He is said to be struggling like
a lamer duck.
 Stag—is a trader who applies for shares in
IPO, He is a optimist .
Some Terms

 Scalping---Is a trading style where small

price gaps created by the Bid-Ask spread are
exploited.
 MACD—Is calculated by subtracting the 26
days Moving average from the 12 days
moving average, 9 days VA, IS THE SIGNAL
LINE plotted on top of the MACD, functioning
as a trigger for buy and sell signal.
 When MACD falls below the signal line , it is
a bear signal .When the security price
diverges from the MACD, it signals the end of
the trend.
 The shorter ma pulls away from the long
ma,, it is a signal that the sector is over
bought and will soon return to normal trend.
Bollinger Band

 *The closer the price moves to the upper

band, over bought.
 *Closer to the lower band---Over sold.
 ------------------------------------------------------
 Value stocks, momentum stocks, growth
stocks.---breadth of the market.
Grave stone Doji Formation

 50 days ma, line normally damps out most of

the short term oscillators, thus can be taken
as a reliable “moving support line”
 Buy signal, if it is in uptrend and if the price
bounces back after it torches or penetrates
the 50 days ma line.
FIBONACCI NUMBERS

 38.2%retrancement usually imply that the

prior trend will continue. 61.8%retracements
imply anew trend is establishing itself.
Strategies

 Contrarian
 Follow the smart money.
 Momentum indicators.
 Stock price-volume technique.
 Tendency of the stock is to rise between December 31 and the
end of the first week in January. The January Effect occurs
because many investors choose to sell some of their stock
right before the end of the year in order to claim capital for tax
purposes. Once the tax calendar rolls over to a new year on
January 1st these same investors quickly reinvest their money
in the market, causing stock prices to rise. Although the
January Effect has been observed numerous times throughout
history, it is difficult for investors to profit from it since the
market as a whole expects it to happen and therefore adjusts
its prices accordingly.
Macro economic Factors

 Investor confidence(Confidence risk)

 Interest Rates(Time Horizon risk)
 Inflation(Inflation Risk)
 Real business activity(Business cycle risk)
 Market index(Market timing risk)
Salomon brothers RAM Model

 Changes in expected long run economic growth

 Short run business cycle risk
 Long term bond yield changes
 Short term treasury bill changes.
 Inflation shock
 Dollar changes versus trading partner
currencies.
Thank you