A Comparative Study On Fundamental and Technical Analysis As An Indicator For Investment Decision-Making
A Comparative Study On Fundamental and Technical Analysis As An Indicator For Investment Decision-Making...
A Comparative Study On Fundamental and Technical Analysis As An Indicator For Investment Decision-Making
CHITKARA BUSINESS SCHOOL in partial fulfilment of the requirements for the award of degree of
MASTER OF BUSINESS ADMINISTRATION Submitted by:
Dr. Renuka Sharma
(Associated Finance Prof.)
CHITKARA BUSINESS SCHOOL CHITKARA UNIVERSITY 2011-13
DECLARATION I, “Ankush Padha”. hereby declare that the work presented herein is genuine work done originally by me and has not been published or submitted elsewhere. Any literature, date or work done by
others and cited in the report has been given due acknowledgement and
listed in the reference section.
(Student‟s Name & Signature) CUN110551002 (Roll NO.)
Date: 15th July 2012
TO WHOMSOEVER IT MAY CONCERN This is to certify that the project titled ” A Comparative Study On Fundamental and Technical Analysis As An Indicator For Investment Decision-Making” carried out By Mr.Ankush Padha,
Mr.Arun Kumar Sharma has been accomplished
under my guidance &supervision as a duly registered MBA student of Chitkara university. This project is being submitted by him in the partial fulfilment of the requirements for the award of the Master of Business Administration from Chitkara university.
His dissertation represent his original work and is worthly of consideration for the award of the degree of Master of Business Administration.
EXECUTIVE SUMMARY EQUITY ANALYSIS is the systematic study of the performance of companies in stock market with help of fundamental analysis and technical analysis. Equity analysis consists of fundamental analysis & technical analysis. While decision in investment of shares should be base on actual movement of shares price measured more in money & percentage term & nothing else. In equity analysis, calculations are based on FACTS & not on HOPE. The subject of equity analysis, i.e. the to attempt to determine future share price movement with the help of RATIO ANALYSIS, STUDY OF GRAPH. Equity analysis does not discuss how to buy & sell shares, but does discuss the methods, which enables the investor to arriving at buying & selling decision. The Technical Approach to investment is essentially a reflection of the idea that prices moves in a trend that are determined by the changing attitude of investor‟s toward a variety of economic, monetary, political and psychological forces. The art of technical analysis, for it is an art, is to identify a trend reversal at a relatively early stage and ride on that trend until the weight of the evidence shows or proves the trend has reversed.
CONTENTS CHAPTERS NO. 1. 19
INTRODUCTION TO THE CORPORATION AND COMPANY 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9
About Destimoney Services provided by the Organization Key Management Business Network and Source of Finance Mission and Vision SWOT analysis of the company Distribution structure Financial Statement And Trend Analysis of the Company Conclusion
11 5 6 9 12 13 16 17 19
INTRODUCTION AND RESEARCH METHODOLOGY 2.1 Introduction 2.2 Research Methodology 2.2.1Need for the study 2.2.2 Objectives of the study 2.2.3Sources of Data 2.2.4Research Design 2.2.5Sampling Method 2.2.6Sampling Size 2.2.7 Limitations of the study 2.2.8Chapter Plan
20-23 20 21 21 21 22 22 22 22 23 23
FUNAMENTAL ANALYSIS 3.1 Meaning of fundamental Analysis 3.2 Two analytical models 3.3 Interpretation 3.3.1Economic analysis 3.3.2Industry analysis 3.3.3Company analysis 3.4 Use by different portfolio styles 3.5 Top-down and bottom-up 3.6 Procedures 3.7 Conclusion
25-35 25 26 27 27 29 30 33 33 34 34
TECHNICAL ANALYSIS 4.1 Meaning of Technical Analysis 4.2 Assumptions of Technical Analysis 4.3 Technical Analysis and Fundamental Analysis 4.4 The Critics of Technical Analysis 4.5 Co-existence of Technical Analysis and Fundamental Analysis
36-71 36 36 38 39 40
4.6.8 Support and Resistance 4.6.9 Volume 4.6.10Random-Walk Hypothesis 4.6.11 Technical Trends 4.6.12 Trend-Lengths 4.6.13 Trend-Line 4.6.14 Channels 4.6.15 Technical Charts Technical Indicators 4.7.1Moving Average Convergence Divergence 4.7.2Relative Strength Index 4.7.3Stochastic Oscillator 4.7.4The Dow-Theory 4.7.5The Short-Interest Ratio 4.7.6The Confidence Index 4.7.7Spreads 4.7.8The Advance-Decline Ratio 4.7.9The Market Breadth Index 4.7.10The Odd-lot Ratio 4.7.11Insider Transactions 4.7.12The Credit-Balance Theory 4.7.13Performance of Linked Markets Summary
41 44 46 46 47 48 49 50 63 64 66 66 67 68 69 69 69 69 70 70 71 71 71
A SAMPLE SURVEY 5.1 Objectives of the Survey 5.2 Sample Composition 5.3 Outcomes of the Survey 5.4 Opinion of the Investors
75-87 75 75 78 87
CONCLUSION AND SUGGESTIONS 6.1 Findings 6.2 Suggestions 6.3 Conclusion
90-92 90 91 92
BIBLIOGRAPHY WEBLIOGRAPHY APPENDIX
93 94 95
CHAPTER – 1 COMPANY PROFILE
Enterprises Pvt. Ltd. 1.1 ABOUT DESTIMONEY Destimoney‟s origins can be traced back to the City of London over 80 years ago. At that time called Dawnay Day, it entered India in 2006, was purchased by New Silk Route in 2008, and under its new share holders and management was renamed Destimoney. NSR (New Silk Route) had acquired 100% stake in the business. Vivek Vig is the CEO of Destimoney group. He is former Country Head of Centurion Bank of Punjab. He also worked as the Country Head of Citibank in Saudi Arabia, Turkey Business Head in Taiwan and Poland. Currently, Destimoney has a network of over 130 branches spread in over 70 locations in 20 states across the country. With an unrelenting focus on twin values of "Integrity" and "Client First" Policy, Destimoney, with the help of over 3000 employees and a strong IT infrastructure, provides advisory services to individuals and institutional clients in India and abroad. Destimoney (erstwhile Dawnay Day AV) is an innovative financial services provider and advisory firm, formed in the year 2006 as a subsidiary of Dawnay Day UK. In mid 2008, NSR (New Silk Route) had acquired 100% stake in the business. The Destimoney Group at present has 4 business lines; Destimoney India Services Pvt Ltd, which provides portfolio management services; Destimoney Enterprises Pvt Ltd, which provides financial advisory services and distributes insurance products, loans, fixed deposits, mutual funds, structured products; Destimoney Securities Pvt Ltd., which deals with broking of stocks & shares; Decimal Point Analytics, which is into global research outsourcing businesses. Our vision is to build a world class customer centric financial services enterprise that fulfils the financial needs of “Middle India” with “Global Processes” and focuses on profitable growth. We plan to do this, by distributing all financial products and manufacturing a select
few and building an organization that unlocks the potential across four dimensions, viz. individual, team, customer and market place In providing services to our clients, we take the fiduciary trust they place in us very seriously. By strictly adhering to our core values, we ensure that our processes, risk management systems, and staffing are concentrated solely on preserving and ncreasing our clients‟ hard earned capital within a transparent and controlled investment process.
Destimoney has four business lines: DESTIMONEY GROUP
DESTIMONEY INDIA SERVICE (Portfolio Management Service)
DESTIMONEY POINT ANALYSIS (Global Research Outsourcing)
DESTIMONEY ENTERPRISE (Financial products distribution,Investment Advisory,CorporateAdvisory Services)
DESTIMONEY SECURITIES (Broking & DP Operations, Member of BSE,NSE, NSDL,CDSL)
1.2 SERVICES PROVIDED BY THE ORGANIZATION
The Way Forward BROKING INVESTMENT
d est im o n ey
WILLS & TRUST
1.3 KEY MANAGEMENT
1.Sudip Bandyopadhyay MD & CEO A Chartered Accountant by profession, he has over 23 years of experience in the financial sector in the areas of capital market, money market and currency market operations.He has worked with reputed organizations like HLL, ITC & Reliance Money. He created & led Reliance Money, the largest retail broking and distribution company during his stint in Reliance as MD & CEO. Sudip was also responsible for the acquisition of AMP Sanmar that launched Reliance‟s foray in the Life Insurance segment. 2.Jhuma Guha President A Chartered Accountant and a Company Secretary with over 18 years of experience in the Finance, Legal, Compliance, Risk, M&A and General Management domains.Worked with companies such as ITC and Reliance Money. 3.K Giri Chief Finance Officer Former Country Controller - Nestle (Uzbekistan) and Group CFO for Destimoney Enterprises for more than 3 years. 4.Gurmeet Singh Head of Broking Over 12 years experience in Product Management & Business Development.Has worked in start-up teams of leading organisations such as Baazee.com (now eBay), ICICI Direct, Reliance Money & NSEL. 5.Anand Maliwal Chief Technology Officer Anand Maliwal, is an Engineer and an MBA. He has over a decade of experience in technology and operations, across a wide spectrum of banking & financial services
companies in India, Japan & UK, including Networth Stock Broking, India Infoline and Cognizant Technology Solutions. 6.Sunando Guha Chief Human Resources Officer A Chartered Accountant with an accumulated experience of 20 years in the manufacturing sector and financial services in India and abroad, which includes stints with organisations like Tata Tea , Philips, Ceat, Wall Street Finance and HSBC Holdings plc. 7.Zahid Gawandi Chief Marketing Officer An MBA in Marketing from Mumbai University, he has over 16 years of experience in Marketing & Brand management. Having worked for Advertising Agencies like Dentsu, Percept & Corporates like Reliance Money & Spice Group, he has successfully handled high profile MNC & Indian brands, winning accolades for excellence in formulating and executing inventive brand communication strategies.He was also instrumental in launching the Reliance Money brand in India. 8.Sanjay Nayak Head of Operation Sanjay Nayak is a Post Graduate in commerce from Mumbai University. He has an experience of two decades in the Industry In Operations. Has worked `with J.M. Share and Stock Brokers (currently known as J.M.Financial), Prime Broking Services, SG Asia Securities. Previous tenure was with India Infoline Limited for eight years as Head of Operations. He has a complete proficiency with the entire gamut of Broking Operations including Institution Broking, Retail Broking, Settlements, Fund Accounting, Depository Operations, Wealth Management and PMS Operations. 9.Anirudh Jain Head of Distribution Anirudh is an MBA & also an Associate Financial Planner. He has detailed knowledge and understanding of Insurance and Investment space in India for the last 10 years. Prior to joining Destimoney, he was associated with the Banking sector having worked for reputed organizations like HDFC Bank & India Bulls where he was instrumental in spearheading the
Bancassurance Business looking after Life & General Insurance Business across all the verticals. His go-to-market strategies helped in successful market penetration and product launches for various customer segments. Anirudh has displayed leadership skills in managing consistent branch performances Pan-India & develop strategies and action plans to win new business & revenue streams. 10.Prashant Bansal Head of Wealth Management Prashant has more than 15 years of experience behind him in the areas of Private Banking, Product Management and Sales Strategy. Prior to joining Destimoney he worked with American Express, Standard Chartered
1.4 BUSINESS NETWORK AND SOURCE OF FINANCE FUNDING PARTNER – NEW SILK ROUTE New Silk Route is a leading Asia-focused growth capital firm founded in 2006 with over $1.4 billion under management, focused on the Indian subcontinent, as well as other rapidly growing economies in Asia and the Middle East. NSR have made 9 Investments to date in sectors of Consumer Services, Telecom, Manufacturing, Financial Services and Infrastructure. They have a team of 16 Investment Professionals working out of 4 offices; New York, Mumbai, Dubai, and Bangalore NSR – Top Management Chairman Rajat Gupta
CEO Parag Saxena
Senior Advisor Victor Menezes
FINANCIAL SERVICE DOMAIN
Destimoney is one of India‟s leading retail financial services and distribution companies, a world-class customer-centric services enterprise that fulfils the financial needs of „Middle India, with global processes and a focus on profitable growth. Destimoney distributes all financial products, and manufactures a select few. They develop individually structured financial products for their customers - from universal real life needs for family, security, health assurance and education to wealth creation and home ownership; on to lifestyle and business requirements, and continuing along the road to retirement and estate planning,
ALLINANCES & PARTNERSHIPS
Strategic partnership with PNB to acquire up to a 49% stake in its housing finance subsidiary.
Destimoney recently entered into a partnership with Dhanlaxmi Bank to enable the Bank‟s customers to trade on Destimoney‟s online e-broking platform.
Under the new partnership with Artha Money, Artha money‟s customers will be able to seamlessly access and use Destimoney‟s online equity trading platform, while Destimoney‟s customers will be able to use Artha Money‟s online commodity trading platform.
The Destimoney Group at present has 4 business lines;
Destimoney India Services Pvt. Ltd, which provides portfolio management services.
Destimoney Enterprises Pvt. Ltd, which provides financial advisory services and distributes o Insurance products
Bajaj Allianz Life Insurance.
Royal Sundram Health Cover.
Home loans (In partnership with Punjab National Bank.)
LAP (Loan against property).
o Fixed deposits, mutual funds, structured products.
Destimoney Securities Pvt. Ltd., which deals with broking of stocks & shares.
Decimal Point Analytics, which is into global research outsourcing businesses.
1.5 MISSION & VISION VISION Destimoney vision is to build a world class customer centric financial services enterprise that fulfils the financial needs of “Middle India” with “Global Processes” and focuses on profitable growth. Destimoney plans to do this, by distributing all financial products and manufacturing a select few and building an organization that unlocks the potential across four dimensions, viz. individual, team, customer and market place.
MISSION Organization‟s mission is to forge strong, sustained relationships with the clients by creating value for them within a transparent and controlled investment process.
1.6 SWOT ANALYSIS STRENGTHS
Destimoney Enterprises Pvt. Ltd. is a leading financial service provider under Asia‟s leading non financial organization “New silk Route” with Strategic partnership with PNB to acquire up to a 49% stake in its housing finance subsidiary.
Destimoney recently entered into a partnership with Dhanlaxmi Bank to enable the Bank‟s customers to trade on Destimoney‟s online e-broking platform.
Under the new partnership with Artha Money, Artha money‟s customers will be able to seamlessly access and use Destimoney‟s online equity trading platform, while Destimoney‟s customers will be able to use Artha Money‟s online commodity trading platform.
Destimoney‟s product mix comprises established and renowned companies for investments like Bajaj Allianz, Royal Sundram etc.
Destimoney‟s biggest strength is in its efficiency in sale and advisory of financial investment instruments.
Destimoney is very new brand for investors in the market. So it is struggling to make its name in the market due to intense completion.
Till now company hasn‟t done much in terms of promotional activities to attract the customers from the market.
Company‟s online service is only for its own products like mutual funds and DMAT accounts.
Company‟s online service approach is not very effective as it does not provide any kind of information about product and investment details accept its business domain.
Company is also struggling in acquiring new customers. The customer acquisition rate is a bit slower as compare to its competitors.
Company is concentrating on middle class investors under its “middle India” Plan. But still there are other segments which can be targeted simultaneously.
Although company has done well in order to establish new partnerships with financial & non financial institutions but still company may expand its domain by involving new product series in its product mix.
Destimoney is also going to launch its own product line along with currently available DMAT facility. So it will provide a good opportunity to the company to promote it self not as a third party service provider but also as a leading financial service company.
As the company is new in the market, it is very selective in its approach whether it is related to sale or to its partners. But due to intense competition in the market, company is finding it difficult to establish a brand value against the companies like India Bulls, Religare, and Standard Chartered etc.
Aggressive promotional strategies by close competitors may hamper Destimoney‟s acceptance by new clients.
The lack in technical knowledge about the products & instruments among sales staff is not a cost effective venture for the company.
We have footprints in 16 locations and 24 branches (Direct Sales)
MAHARASHTRA 4 ANDHRA PRADESH 1 GUJARAT 2 MADHYA PRADESH 2 TAMILNADU 1 KARNATAKA 1 RAJASTHAN 2 DELHI 6 PUNJAB 4 UTTARANCHAL 1 TOTAL 24
1.7 DISTRIBUTION STRUCTURE
Reg. Sales Heads
Product Team Business Development - Life Insurance Team - General Insurance - Central Level - Mutual Funds & Deposits - Branch Level - Loans -IHO
Training - Training Head - Regional Training Managers
Business Intelligence Unit - MIS support - Dashboard Support - Business Analytics
1.8FINANCIAL STATEMENT AND TREND ANALYSIS OF THE COMPANY (a)Ratios:Mar
Praticulars Liquidity Ratios
Operating Ratios Operating Profit Per Share (Rs) Net Operating Profit Per Share (Rs) Leverage Ratios Interest Cover Total Debt to Owners Fund Financial Charges Coverage Ratio Financial Charges Coverage Ratio Post Tax Profitability Ratios Operating Profit
Margin(%) Gross Profit Margin(%)
Cash Profit Margin(%) Net Profit Margin(%) Return On Capital Employed(%) Return On Net Worth(%) Return on Long Term Funds(%) (b) Trend Analysis ------------------- in Rs. Cr. ------------------
Praticulars Sales Turnover Net Profit Earnings Per Share
ANALYSIS OF THE COMPANY As company has wide scope to grow as compare to its competitor in the market. Company its current asset is 2.05 in 2011 which is counted as a good company and its Profitability Ratio continuous increase and leverage ratio is consant.
is also increase as compare to its previous year as on 2011 it is 5.73 as compare to its previous year which is 4.6.Net profit is also stable as on 2011 its net profit is Rs.13.06crore.Earning per share of the company also increase as on 2011 it is 2.47 which is sufficient and as compare to its previous 3year it is highest.
1.9 CONCLUSION As the financial markets are going towards development with the pace of economic growth, the post-recession market expects a lot from the investors. In this regard it can be seen that there is a huge scope for the companies providing financial services in coming days. So, the opportunity to gain more and create a brand equity is there and it is not too hard for a market player like Destimoney to achieve such. A mare sophistication and improvement in services can pay much.
CHAPTER – 2 INTRODUCTION AND RESEARCH METHODOLOGY 2.1 INTRODUCTION Money is honey for modern man!! In this modern and fast changing world where a cut-throat competition exits it is treated as the essence of life. It has become the sole purpose of every human activity. It is the sole target of every start. Starting from the unsunshine lower levels of deep blue Pacific to the upper layers of Troposphere each and every component is money oriented now a days. To fulfil such need of money and wealth, modern man uses investment as a want satisfying and wealth maximizing tool. Taking investment decisions has become a part of our economic life. Everybody makes such decisions in different contexts at different times. The appropriateness of such decisions makes someone Warren Buffet where as some become bankrupts. Therefore, it is very important to understand and know the right way to take sound investment decisions which can be made in order to improve the chance of making profits through them. As investment is concerned, the stock market is treated as the most profitable and efficient battle field. It gives a scope to earn extra ordinary income by taking high level of risk where uncertainty exists always. So it is not a game of a child to find the right time and right choice to invest in. Investment decision-making in such situation can best be viewed as an integrated process to which security analysis makes its unique contribution. And, in the process of security analysis, Technical Analysis is treated as the Polestar which shows the direction to proceed. Technical Analysis serves the investment decision-maker by pointing the direction that is most likely to produce the desired results and to meet the expectations of the investors. Whether Technical analysis will ever be classified as a science is doubtful, but research, training and experience have developed it into a discipline, which means a structured, consistent and orderly process without rigidity in either concepts or methods.
2.2 RESEARCH METHODOLOGY 2.2.1 NEED FOR THE STUDY
Where the herds of bulls and beers are peeping to the stock market in an expectation to grab the opportunity to take the advantage of volatility, a study on Technical Analysis is very much needed to cope with the moment-change market fluctuations in the expected direction to earn desired profits. This research study fulfils the needs of the speculators, investors and students to acquire knowledge regarding various technical aspects of investing the most liquid and hard-earned money not only in profitable stocks, but also at the right time and at the right price. The thesis describes the various trends and chart patterns which are very much helpful to find the timing of investment at different market situations. This study contributes to the knowledge of Stock analysis through integration of the review of literature and methodology developed for the understanding and resolution of various related indicators and techniques regarding investment decision-making in stock market, and empirical work done there on. The purpose of the summer project report is to allow the study within a coherent, organized and standardized framework which is necessary to enhance understanding to grasp knowledge and to clarify the subject matter. It is needed for the direction and procedure of the study to bring it up to the required scope, coverage, rigor and also to enhance the quality of research effort. 2.2.2 OBJECTIVES OF THE STUDY This project was started with an objective to know the basic tools, trends and chart patterns of Technical Analysis and their implications at the time of investment decision-making. How investors can gain more out of their investment by using the tools of Technical Analysis is the central objective of this research study. Collecting information regarding investors‟ response and belief towards Technical Analysis is also an additional objective that forced to undertake such research study.
2.2.3 SOURCES OF DATA This section of the project emphasizes on the procedure used to accomplish the project. For this purpose some data have been collected basically from two sources: Primary Source
Secondary Source Primary Source The data collected from primary sources are raw-data. These are the data that are collected first-hand and have not had any previous meaningful interpretation. The primary data will be collected through observation, questionnaire and through well-tested personal interviews with the investors at the door of number of broking houses. Secondary Source Any data used that have been collected earlier for some other purposes are known as Secondary Data. The secondary data has been collected such from various internet portals, research articles, reference books and various T.V. programmes related to the topic. 2.2.4 RESEARCH DESIGN The present research study will adopt Descriptive Research Design for properly designing the research work. Through this, the topic will be studied thoroughly and it will be presented by giving necessary findings and conclusions. 2.2.5 SAMPLING METHOD The method adopted is Convenient Sampling method because it was necessary to cover all types of investors and at different places all over the city, even if by taking the help of cell phone. 2.2.6 SAMPLE SIZE The total sample size was 200 and included small investors, speculators, businessmen, research scholars and finance students. The interview was conducted inside the city of Delhi, Jammu and Chandigarh only.
2.2.7 LIMITATIONS OF THE STUDY Although necessary precautions have taken, still this study suffers from the following limitations: The study consists of detailed theoretical explanations.
The time period allowed for the study was quite insufficient to cover and analyse all the technical aspects and to compare it with the behaviour of the stock market. More importance has been given to the subject matter of Technical Analysis only. The wide range of chart-patterns and trends may create confusion while going through these. The study may act as a magic-pedia for a layman having no basic knowledge regarding securities market. Confidentiality of information was the biggest limitation that corporate people and investors were not willing to share. The primary limitation of the study is that, the survey is limited within the city of Bhubaneswar only. 2.2.8 CHAPTER PLAN The study has been divided in to two parts such as the Theoretical aspect and the Practical aspect. The first part contains a wide explanation of the theories of Fundamental and Technical analysis where as the second part is enriched with the response of the investors‟ and their beliefs with respect to Technical Analysis. By looking chapter-wise, Chapter-1 opens the door to enter in to the subject. Chapter-1 gives information about the company under which the summer internship has been made. Chapter-3 gives a broad idea regarding Fundamental Analysis. Chapter-4 gives a broad idea regarding Technical Analysis. It narrates about the tools available in Technical Analysis and explains the various indicators that signals investor-action and guides to expect the future uncertain market condition. Chapter-5 analyses the data that has been collected from primary sources reflecting the role of technical charts and trends at the time of investment decision-making. It gives an idea regarding the applicability and popularity of Technical Analysis in investor-world. It depicts the response of the investors. And, lastly the study comes to an end with chapter-6 that narrates the Conclusion and suggestions extracted from this study with conclusion.
CHAPTER – 3 FUNDAMENTAL ANALYSIS 3.1 MEANING OF FUNDAMENTAL ANALYSIS Fundamental analysis is the study of economic, industry, and company conditions in an effort to determine the value of a company's stock. Fundamental analysis typically focuses on key statistics in a company's financial statements to determine if the stock price is correctly valued. I realize that some people will find a discussion on fundamental analysis within a book on technical analysis peculiar, but the two theories are not as different as many people believe. It is quite popular to apply technical analysis to charts of fundamental data, for example, to compare trends in interest rates with changes in security prices. It is also popular to use fundamental analysis to select securities and then use technical analysis to time individual trades. Even diehard technicians can benefit from an understanding of fundamental analysis (and vice versa). Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. When applied to futures and forex, it focuses on the overall state of the economy, interest rates, production, earnings, and management. When analyzing a stock, futures contract, or currency using fundamental analysis there are two basic approaches one can use; bottom up analysis and top down analysis. The term is used to distinguish such analysis from other types of investment analysis, such as quantitative analysis and technical analysis. Fundamental analysis is performed on historical and present data, but with the goal of making financial forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its probable price evolution,
to make a projection on its business performance,
to evaluate its management and make internal business decisions,
to calculate its credit risk.
Fundamental Analysis The Analysis of economy, industry and company constitute the main activity in the fundamental approach to security analysis. And can be viewed as different stages in investment decision making process.
Three tier analysis depict that company performance dependent not only on its own effort but also on the general industry and economy factor.
3.2 TWO ANALYTICAL MODELS When the objective of the analysis is to determine what stock to buy and at what price, there are two basic methodologies 1. Fundamental analysis maintains that markets may misprice a security in the short run but that the "correct" price will eventually be reached. Profits can be made by purchasing the mispriced security and then waiting for the market to recognize its "mistake" and reprice the security. 2. Technical analysis maintains that all information is reflected already in the stock price. Trends 'are your friend' and sentiment changes predate and predict trend changes. Investors' emotional responses to price movements lead to recognizable price chart patterns. Technical analysis does not care what the 'value' of a stock is. Their price predictions are only extrapolations from historical price patterns. Investors can use any or all of these different but somewhat complementary methods for stock picking. For example many fundamental investors use technicals for deciding entry and exit points. Many technical investors use fundamentals to limit their universe of possible stock to 'good' companies.
The choice of stock analysis is determined by the investor's belief in the different paradigms for "how the stock market works". See the discussions at efficient-market hypothesis, random walk hypothesis, capital asset pricing model, Fed model Theory of Equity Valuation, Marketbased valuation, and Behavioral finance.
3.3 INTERPRETATION Fundamental analysis includes: 1.Economic analysis 2.Industry analysis 3.Company analysis 3.3.1 ECONOMIC ANALYSIS The economy is studied to determine if overall conditions are good for the stock market. Is inflation a concern? Are interest rates likely to rise or fall? Are consumers spending? Is the trade balance favorable? Is the money supply expanding or contracting? These are just some of the questions that the fundamental analyst would ask to determine if economic conditions are right for the stock market. A. Influence of the economy on the company. These are the following factor: 01. Economic Growth 02. Populations 03. Monsoons and Agriculture Production 04. Natural resources and availability of raw material 05. Industrial Productions 06. Inflation 07. Interest rate 08. Foreign exchange reserve 09. Balance of payment position 10. Budget deficits 11. Public debt and foreign debt
12. Domestic saving and capital output rate 13. Employments 14. Taxation policies 15. Infrastructure facilities 16. Government policies 17. Political Stability 18. International developments 19. Capital formations 20. Saving pattern 21. Economic indicators 22. Foreign direct investments 23. Rupee-Dollar Fluctuation 24. Stock News
Economy Analysis Boom Economy: Income rise and demand for goods will increase the industries and companies in general tend to be prosperous.
Recession Economy: Income decline and demand for goods will decrease the industries and companies in general tend to be bad performance
Depression: At this stage demand is low and declining inflation often high and so are interest rate, companies usually reduce activities and securities performance is poor.
Recovery: Economy begin to revive after depression, demand pick up leading, production and activities increase.
Boom: High demand with high investment and production, companies earn more profit
Recession: Companies slowly begins downturn in demand, production and employment, profits are also decline.
3.3.2 INDUSTRY ANALYSIS The company's industry obviously influences the outlook for the company. Even the best stocks can post mediocre returns if they are in an industry that is struggling. It is often said that a weak stock in a strong industry is preferable to a strong stock in a weak industry. The industry analysis should take in to account the following factors as influence the performance of the company, whose share prices are to be analyzed. Product Line. It is also necessary to know the industries with a high growth potential like computers, electronics, chemicals, diamonds, textiles etc. and whether the industry is in the priority sector of the key industry group of capital goods or consumers goods group. Raw Material and Inputs. Under these head, we have to look in to industries depending on imports of scare raw materials, competition from other companies and industries and the barriers to entry of new company, protection from foreign competition, import and export restriction etc. Capacity Installed and Utilized. The demand for industrial product in the economy is estimated by the planning commission and the Government, and the units are given licensed capacity on the basis of these estimates.
Industry Characteristics. It included whether the industry is cyclical, fluctuating of stable. It is also important industry produce seasonal product or FMCG. It also included demand of product freight charges, cost of production, advertisement cost, skill of operation, profitability. Demand and Market. It includes demand of the product in the market and price of raw material and other input cost like freight, electricity, season, monsoon, etc. if the nature of product is such as drugs, fertilizer or other consumer goods, whose price and distribution control by Government. Government Policy with regard to Industry Government Policy is announced in the industrial policy resolution and Subsequent announcement from time to time by the Government. The Policy strategy as laid down in the five years plans according to planning commission and expected demand in the economy. 3.3.3 COMPANY ANALYSIS After determining the economic and industry conditions, the company itself is analyzed to determine its financial health. This is usually done by studying the company's financial statements. From these statements a number of useful ratios can be calculated. The ratios fall under five main categories: profitability, price, liquidity, leverage, and efficiency. When performing ratio analysis on a company, the ratios should be compared to other companies within the same or similar industry to get a feel for what is considered "normal." At least one popular ratio from each category is shown below. At the final stage of fundamental analysis, the investor analyses the company. This analysis has two thrusts: 1. How has the company performed vis-a-vis other similar companies? and 2. How has the company performed in comparison to earlier years It is imperative that one completes the economic analysis and the industry analysis before a company is analysed because the company‟s performance at a period of time is to an extent a reflection of the economy, the political situation and the industry. What does one look at when analysing a company? There is no point or issue too small to beignored. Everything matters.
The different issues regarding a company that should be examined are: 1. The Management 2. The Company 3. The Annual Report 4. Cash flow 5. Ratios Net Profit Margin. A company's net profit margin is a profitability ratio calculated by dividing net income by total sales. This ratio indicates how much profit the company is able to squeeze out of each Rupee of sales. For example, a net profit margin of 30%, indicates that Rs.0.30 of every Rs.1.00 in sales is realized in profits. P/E Ratio. The P/E ratio (i.e., Price/Earnings ratio) is a price ratio calculated by dividing the security's current stock price by the previous four quarter's earnings per share (EPS). The P/E Ratio shows how much an investor must pay to "buy" Rs.1 of the company's earnings. For example, if a stock's current price is Rs.20 and the EPS for the last four quarters was Rs.2, the P/E ratio is 10 (i.e., Rs.20 / Rs.2 = 10). This means that you must pay Rs.10 to "buy" Rs.1 of the company's earnings. Of course, investor expectations of company's future performance play a heavy role in determining a company's current P/E ratio. A common approach is to compare the P/E ratio of companies within the same industry. All else being equal, the company with the lower P/E ratio is the better value. Book Value Per Share. A company's book value is a price ratio calculated by dividing total net assets (assets minus liabilities) by total shares outstanding. Depending on the accounting methods used and the age of the assets, book value can be helpful in determining if a security is overpriced or under-priced. If a security is selling at a price far below book value, it may be an indication that the security is under-priced. Current Ratio. A company's current ratio is a liquidity ratio calculated by dividing current assets by current liabilities. This measures the company's ability to meet current debt obligations. The higher the ratio the more liquid the company. For example, a current ratio of 3.0 means that the company's current assets, if liquidated, would be sufficient to pay for three times the company's current liabilities.
Debt Ratio. A company's debt ratio is a leverage ratio calculated by dividing total liabilities by total assets. This ratio measures the extent to which total assets have been financed with debt. For example, a debt ratio of 40% indicates that 40% of the company's assets have been financed with borrowed funds. Debt is a two-edged sword. During times of economic stress or rising interest rates, companies with a high debt ratio can experience financial problems. However, during good times, debt can enhance profitability by financing growth at a lower cost. Inventory Turnover. A company's inventory turnover is an efficiency ratio calculated by dividing cost of goods sold by inventories. It reflects how effectively the company manages its inventories by showing the number of times per year inventories are turned over (replaced). Of course, this type of ratio is highly dependent on the industry. A grocery store chain will have a much higher turnover than a commercial airplane manufacturer. As stated previously, it is important to compare ratios with other companies in the same industry. Stock Price Valuation After determining the condition and outlook of the economy, the industry, and the company, the fundamental analyst is prepared to determine if the company's stock is overvalued, undervalued, or correctly valued. Several valuation models have been developed to help determine the value of a stock. These include dividend models which focus on the present value of expected dividends, earnings models which focuses on the present value of expected earnings, and asset models which focus on the value of the company's assets. There is no doubt that fundamental factors play a major role in a stock's price. However, if you form your price expectations based on fundamental factors, it is important that you study the price history as well or you may end up owning an undervalued stock that remains undervalued.
3.4 USE BY DIFFERENT PORTFOLIO STYLES Investors may use fundamental analysis within different portfolio management styles.
Buy and hold investors believe that latching onto good businesses allows the investor's asset to grow with the business. Fundamental analysis lets them find 'good' companies, so they lower their risk and probability of wipe-out.
Managers may use fundamental analysis to correctly value 'good' and 'bad' companies. Eventually 'bad' companies' stock goes up and down, creating opportunities for profits.
Managers may also consider the economic cycle in determining whether conditions are 'right' to buy fundamentally suitable companies.
Contrarian investors distinguish "in the short run, the market is a voting machine, not a weighing machine". Fundamental analysis allows you to make your own decision on value, and ignore the market.
Value investors restrict their attention to under-valued companies, believing that 'it's hard to fall out of a ditch'. The value comes from fundamental analysis.
Managers may use fundamental analysis to determine future growth rates for buying high priced growth stocks.
Managers may also include fundamental factors along with technical factors into computer models (quantitative analysis).
3.5 TOP-DOWN AND BOTTOM-UP Investors can use either a top-down or bottom-up approach.
The top-down investor starts his analysis with global economics, including both international
as GDP growth
rates, inflation, interest rates, exchange rates, productivity, and energy prices. He narrows his search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then he narrows his search to the best business in that area.
The bottom-up investor starts with specific businesses, regardless of their industry/region.
3.6 PROCEDURES The analysis of a business' health starts with financial statement analysis that includes ratios. It looks at dividends paid, operating cash flow, new equity issues and capital financing. The earnings estimates and growth rate projections published widely by Thomson Reuters and others can be considered either 'fundamental' (they are facts) or 'technical' (they are investor sentiment) based on your perception of their validity.
The determined growth rates (of income and cash) and risk levels (to determine the discount rate) are used in various valuation models. The foremost is the discounted cash flow model, which calculates the present value of the future
dividends received by the investor, along with the eventual sale price. (Gordon model)
earnings of the company, or
cash flows of the company.
The amount of debt is also a major consideration in determining a company's health. It can be quickly assessed using the debt to equity ratio and the current ratio (current assets/current liabilities). The simple model commonly used is the Price/Earnings ratio. Implicit in this model of a perpetual annuity (Time value of money) is that the 'flip' of the P/E is the discount rate appropriate to the risk of the business. The multiple accepted is adjusted for expected growth (that is not built into the model). Growth estimates are incorporated into the PEG ratio, but the math does not hold up to analysis. Its validity depends on the length of time you think the growth will continue. IGAR models can be used to impute expected changes in growth from current P/E and historical growth rates for the stocks relative to a comparison index. Computer modelling of stock prices has now replaced much of the subjective interpretation of fundamental data (along with technical data) in the industry. Since about year 2000, with the power of computers to crunch vast quantities of data, a new career has been invented. At some funds (called Quant Funds) the manager's decisions have been replaced by proprietary mathematical models.
3.7 CONCLUSIONS Fundamental analysis can be valuable, but it should be approached with caution. If you are reading research written by a sell-side analyst, it is important to be familiar with the analyst behind the report. We all have personal biases, and every analyst has some sort of bias. There is nothing wrong with this, and the research can still be of great value. Learn what the ratings mean and the track record of an analyst before jumping off the deep end. Corporate statements and press releases offer good information, but they should be read with a healthy degree of skepticism to separate the facts from the spin. Press releases don't happen by
accident; they are an important PR tool for companies. Investors should become skilled readers to weed out the important information and ignore the hype.ignore the hype.
CHAPTER – 4 TECHNICAL ANALYSIS 4.1 MEANING OF TECHNICAL ANALYSIS Technical analysis is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data, primarily price and volume. In its purest form, technical analysis considers only the actual price and volume behaviour of the market or instrument. Technical analysts, sometimes called "chartists", may employ models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, regressions, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns. Technical analysis stands in distinction to fundamental analysis. Technical analysis "ignores" the actual nature of the company, market, currency or commodity and is based solely on "the charts," that is to say price and volume information, whereas fundamental analysis does look at the actual facts of the company, market, currency or commodity. For example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team. 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.
4.2 ASSUMPTIONS OF TECHNICAL ANALYSIS Technical Analysis is based on certain assumptions. It does not matter whether the assumptions are reflected in actual practice or not, investors take those in to consideration while taking investment decisions and analyzing technical indicators. These basic assumptions are:
1. The Market Discounts Everything
A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. Technical analysts believe that the company's fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market. 2. Price Moves in Trends In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption. 3. History Tends To Repeat Itself Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. 4. 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 report, 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.
4.3 TECHNICAL ANALYSIS & FUNDAMENTAL ANALYSIS Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. As we've mentioned, technical analysis looks at the price movement of a security and uses this data to predict its future price movements. Fundamental analysis, on
the other hand, looks at economic factors, known as fundamentals. Let's get into the details of how these two approaches differ, the criticisms against technical analysis and how technical and fundamental analysis can be used together to analyze securities. The Differences 1. Charts vs. Financial Statements At the most basic level, a technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. By looking at the balance sheet, cash flow statement and income statement, a fundamental analyst tries to determine a company's value. In financial terms, an analyst attempts to measure a company's intrinsic value. In this approach, investment decisions are fairly easy to make - if the price of a stock trades below its intrinsic value, it's a good investment. Although this is an oversimplification (fundamental analysis goes beyond just the financial statements). Technical traders, on the other hand, believe there is no reason to analyze a company's fundamentals because these are all accounted for in the stock's price. Technicians believe that all the information they need about a stock can be found in its charts. 2. Time Horizon Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. The different timeframes that these two approaches use is a result of the nature of the investing style to which they each adhere. It can take a long time for a company's value to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a gain is not realized until the stock's market price rises to its "correct" value. This type of investing is called value investing and assumes that the short-term market is wrong, but that the price of a particular stock will correct itself over the long run. This "long run" can represent a timeframe of as long as several years, in some cases. Furthermore, the numbers that a fundamentalist analyzes are only released over long periods of time. Financial statements are filed quarterly and changes in earnings per share don't emerge on a daily basis like price and volume information. Also remember that fundamentals are the actual characteristics of a business. New management can't implement sweeping
changes overnight and it takes time to create new products, marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts use a long-term timeframe, therefore, is because the data they use to analyze a stock is generated much more slowly than the price and volume data used by technical analysts. 3. Trading Versus Investing Not only is technical analysis more short term in nature that fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools.
4.4 THE CRITICS OF TECHNICAL ANALYSIS Some critics see technical analysis as a form of black magic. Don't be surprised to see them question the validity of the discipline to the point where they mock its supporters. In fact, technical analysis has only recently begun to enjoy some mainstream credibility. While most analysts on Wall Street focus on the fundamental side, just about any major brokerage now employs technical analysts as well. Much of the criticism of technical analysis has its roots in academic theory - specifically the efficient market hypothesis (EMH). This theory says that the market's price is always the correct one - any past trading information is already reflected in the price of the stock and, therefore, any analysis to find undervalued securities is useless. There are three versions of EMH. In the first, called weak form efficiency, all past price information is already included in the current price. According to weak form efficiency, technical analysis can't predict future movements because all past information has already been accounted for and, therefore, analyzing the stock‟s past price movements will provide no insight into its future movements. In the second, semi-strong form efficiency, fundamental analysis is also claimed to be of little use in finding investment opportunities. The third is strong form efficiency, which states that all information in the market is accounted for in a stock's price and neither technical nor fundamental can provide investors with an edge. The vast majority of academics believe in at least the weak version of EMH, therefore, from their point of view, if technical analysis works, market efficiency will be called into question.
4.5 CO-EXISTENCE OF TECHNICAL ANALYSIS &FUNDAMENTAL ANALYSIS Although technical analysis and fundamental analysis are seen by many as polar opposites the oil and water of investing - many market participants have experienced great success by combining the two. For example, some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved. Alternatively, some technical traders might look at fundamentals to add strength to a technical signal. For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. Oftentimes, having both the fundamentals and technical‟s on your side can provide the best-case scenario for a trade. While mixing some of the components of technical and fundamental analysis is not well received by the most devoted groups in each school, there are certainly benefits to at least understanding both schools of thought.
4.6 TECHNICAL TOOLS In Technical Analysis, there are a lot of tools and strategies that enable us to draw necessary conclusions at the time of taking important decisions. Some of the most applicable and appreciated tools are discussed below: 4.6.8 SUPPORT AND REGISTANCE A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to "bounce" off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level. A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up. This means the price is more likely to "bounce" off this level
rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level. 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 No.: 4.1 Support And Resistance Source: www.metastock.com
As it can be seen in this Figure, 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). Why does it happen? These support and resistance levels are seen as important in terms of market psychology and supply and demand. Support and resistance levels are the levels at which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in the case of resistance). When these trend lines are broken, the supply and demand and the psychology behind the stock's movements is thought to have shifted, in which case new levels of support and resistance will likely be established. The 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. For example, if a trader identifies an important level of resistance that has been tested several times but never broken, he or she may decide to take profits as the security moves toward this point because it is unlikely that it will move past this level. Support and resistance levels both test and confirm trends and need to be monitored by anyone who uses technical analysis. As long as the price of the share remains between these levels of support and resistance, the trend is likely to continue. It is important to note, however, that a break beyond a level of support or resistance does not always have to be a reversal. For example, if prices moved above the resistance level of an up trending channel, the trend have accelerated and not reversed. This means that the price appreciation is expected to be faster than it was in the channel. Being aware of these important support and resistance points should affect the way that you trade a stock. Traders should avoid placing orders at these major points, as the area around them is usually marked by a lot of volatility. If you feel confident about making a trade near a support or resistance level, it is important that you follow this simple rule: do not place orders directly at the support or resistance level. This is because in many cases, the price never actually reaches the whole number, but flirts with it instead. So if you're bullish on a stock that is moving toward an important support level, do not place the trade at the support level. Instead, place it above the support level, but within a few points. On the other hand, if you are placing stops or short selling, set up your trade price at or below the level of support. Round Numbers and Support and Resistance One type of universal support and resistance that tends to be seen across a large number of securities is round numbers. Round numbers like 10, 20, 35, 50, 100 and 1,000 tend be important in support and resistance levels because they often represent the major psychological turning points at which many traders will make buy or sell decisions. Buyers will often purchase large amounts of stock once the price starts to fall toward a major round number such as INR 50, which makes it more difficult for shares to fall below the level. On the other hand, sellers start to sell off a stock as it moves toward a round number peak, making it difficult to move past this upper level as well. It is the increased buying and selling pressure at these levels that makes them important points of support and resistance and, in many cases, major psychological points as well.
Role Reversal Once a resistance or support level is broken, its role is reversed. If the price falls below a support level, that level will become resistance. If the price rises above a resistance level, it will often become support. As the price moves past a level of support or resistance, it is thought that supply and demand has shifted, causing the breached level to reverse its role. For a true reversal to occur, however, it is important that the price make a strong move through either the support or resistance.
Figure no.: 4. Role Reversal Source: www.trending123.com For example, as you can see in above, the dotted line is shown as a level of resistance that has prevented the price from heading higher on two previous occasions (Points 1 and 2). However, once the resistance is broken, it becomes a level of support (shown by Points 3 and 4) by propping up the price and preventing it from heading lower again. Many traders who begin using technical analysis find this concept hard to believe and don't realize that this phenomenon occurs rather frequently, even with some of the most wellknown companies. In almost every case, a stock will have both a level of support and a level of resistance and will trade in this range as it bounces between these levels. This is most often seen when a stock is trading in a generally sideways manner as the price moves through successive peaks and troughs, testing resistance and support. 4.6.9 VOLUME Volume is simply the number of shares or contracts that trade over a given period of time, usually a day. Higher volume means the security has been more active. 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. Volume bars illustrate how many shares have traded per period and show trends in the same way that prices do.
Figure No.: 4.3 Volume of Shares SOURCE: www.metastock.com
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. Say, for example, that a stock jumps 5% in one trading day after being in a long downtrend. Is this a sign of a trend reversal? This is where volume helps traders. If volume is high during the day relative to the average daily volume, it is a sign that the reversal is probably for real. On the other hand, if the volume is below average, there may not be enough conviction to support a true trend reversal. Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend. For example, if the stock is
in an uptrend but the up trading days are marked with lower volume, it is a sign that the trend is starting to lose its legs and may soon end. When volume tells a different story, it is a case of divergence, which refers to a contradiction between two different indicators. The simplest example of divergence is a clear upward trend on declining volume. Volume and Chart Patterns The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price patterns can be confirmed with volume. In most chart patterns, there are several pivotal points that are vital to what the chart is able to convey to chartists. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened. Volume Precedes Price Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and chartists to form ideas on upcoming trend reversals. If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is about to end. 4.6.10 Random Walk Hypothesis The random walk hypothesis is a financial theory stating that stock market prices evolve according to a random walk and thus the prices of the stock market cannot be predicted. It has been described as 'jibing' with the efficient market hypothesis. Economists have historically accepted the random walk hypothesis. They have run several tests and continue to believe that stock prices are completely random because of the efficiency of the market. 4.7.11 Technical Trends One of the most important concepts in technical analysis is that of trend. The meaning in finance isn't all that different from the general definition of the term - a trend is really nothing more than the general direction in which a security or market is headed.
It is important to be able to understand and identify trends so that
you can trade with rather than against them. Two important sayings in technical analysis are "the trend is your friend" and "don't buck the trend," illustrating how important trend analysis is for technical traders. There are three types of trends as:
As the names imply, when each successive peak and trough is higher, it's referred to as an upward trend. Downtrend It describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.
Figure No.: 4.4 Downtrend Of Share Price Source: www.investopedia.com Downtrend is the opposite of uptrend. Many traders seek to avoid downtrends because they can drastically affect the value of any investment. A downtrend can last for minutes, days, weeks, months or even years so identifying a downtrend early is very important. Once a downtrend has been established (series of lower peaks) a trader should be very cautious about entering into any new long positions. Sideways/Horizontal Trends It describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move. A sideways price trend is also commonly known as a "horizontal trend". Sideways trend is generally a result of the price traveling between strong levels of support and resistance. It is not uncommon to see a horizontal trend dominate the price action of a specific asset for a prolonged period before starting a move higher or lower. Brief consolidation is often needed during large price runs, as it is nearly impossible for such large price moves to sustain themselves over the longer term. 4.6.12 TREND LENGTHS
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as a long-term trend, intermediate trend or a short term trend. In terms of the stock market, a major trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a nearterm trend is anything less than a month. 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. Take a look a Figure 4 to get a sense of how these three trend lengths might look.
Figure No.:4.5 Trendlengths Source: www.metastock.com When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of the long-term trend. Daily data charts are best used when analyzing both intermediate and short-term trends. It is also important to remember that the longer the trend, the more important it is; for example, a one-month trend is not as significant as a five-year trend. 4.6.13 Trendline A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock. Drawing a trendline 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. As it can be seen in the figure, an upward trendline is drawn at the lows of an upward trend. This line represents the support the stock has every time it moves from a high to a low. Notice how the price is propped up by this support. This type of trendline helps traders to anticipate the point at which a stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents the resistance level that a stock faces every time the price moves from a low to a high.
Figure No.: 4.6 Trendline Source: www.metastock.com 4.6.14 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.
Figure no.: 4.7 Channel Source: www.metastock.com Figure illustrates a descending channel on a stock chart; the upper trendline has been placed on the highs and the lower trendline is on the lows. The price has bounced off of these lines several times, and has remained range-bound for several months. As long as the price does not fall below the lower line or move beyond the upper resistance, the range-bound downtrend is expected to continue. 4.6.15 TECHNICAL CHARTS In technical analysis, charts are similar to the charts that you see in any business setting. A chart is simply a graphical representation of a series of prices over a set time frame. For example, a chart may show a stock's price movement over a one-year period, where each point on the graph represents the closing price for each day the stock is traded:
Figure No.: 4.8 A Sample Chart Source: www.stockcharts.com The above figure provides an example of a basic chart. It is a representation of the price movements of a stock over a 1.5 year period. The bottom of the graph, running horizontally
(x-axis), is the date or time scale. On the right hand side, running vertically (y-axis), the price of the security is shown. By looking at the graph we see that in October 2011 (Point 1), the price of this stock was around INR 245, whereas in June 2012 (Point 2), the stock's price is around INR 265. This tells us that the stock has risen between October 2011 and June 2012. 188.8.131.52 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.
1. The Time Scale The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually. The shorter the time frame, the more detailed the chart. Each data point can represent the closing price of the period or show the open, the high, the low and the close depending on the chart used. Intraday charts plot price movement within the period of one day. This means that the time scale could be as short as five minutes or could cover the whole trading day from the opening bell to the closing bell. Daily charts are comprised of a series of price movements in which each price point on the chart is a full day‟s trading condensed into one point. Again, each point on the graph can be simply the closing price or can entail the open, high, low and close for the stock over the day. These data points are spread out over weekly, monthly and even yearly time scales to monitor both short-term and intermediate trends in price movement. Weekly, monthly, quarterly and yearly charts are used to analyze longer term trends in the movement of a stock's price. Each data point in these graphs will be a condensed version of what happened over the specified period. So for a weekly chart, each data point will be a representation of the price movement of the week. For example, if you are looking at a chart of weekly data spread over a five-year period and each data point is the closing price for the week, the price that is plotted will be the closing price on the last trading day of the week, which is usually a Friday. 2. The Price Scale and Price Point Properties
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. The problem, however, is in the structure of the scale itself. A scale can either be constructed in a linear (arithmetic) or logarithmic way, and both of these options are available on most charting services. 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.
Figure No.: 4.9 Price Scale Source: www.metastock.com 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. 184.108.40.206 Types Of Charts
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. 1. 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.
Source: www.metastock.com 2. Bar Charts One of the basic tools of technical analysis is the Bar Chart, where the open, close, high, and low prices of stocks or other financial instruments are embedded in bars which are plotted as a series of prices over a specific time period. Bar charts allow traders to see patterns more easily. In other words, each bar is actually just a set of 4 prices for a given day, or some other time period, that is connected by a bar in a specific way—hence, it is often referred to as a price bar.
Figure No.: 4.11 Price Bar Source: www.thismatter.com A price bar shows the opening price of the financial instrument, which is the price at the beginning of the time period, as a left horizontal line, and the closing price, which is the last price for the period, as a right horizontal line. These horizontal lines are also called tick marks. The high price is represented by the top of the bar and the low price is depicted by the bottom of the bar. 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). Following is a bar chart that represents the details:
Figure No.: 4.12 Bar Chart Source: www.metastock.com 3. Candlestick Charts Another type of chart used in technical analysis is the candlestick chart, so called because the main component of the chart representing prices looks like a candlestick, with a thick body, called the real body, and usually a line extending above and below it, called the upper shadow and lower shadow, respectively. The top of the upper shadow represents the high price, while the bottom of the lower shadow represents the low price. Patterns are formed both by the real body and the shadows. Candlestick patterns are most useful over short periods of time, and mostly have significance at the top of an uptrend or the bottom of a downtrend, when the patterns most often signify a reversal of the trend.
Figure No.: 4.13 Candle-Stick Bar Parts Source: www.wikipedia.com While the candlestick chart shows basically the same information as the bar chart, certain patterns are more apparent in the candlestick chart. The candlestick chart emphasizes opening and closing prices. The top and bottom of the real body represents the opening and closing prices. Whether the top represents the opening or closing price depends on the color of the real body—if it is white, then the top represents the close; black, or some other dark color, indicates that the top was the opening price. The length of the real body shows the difference between the opening and closing prices. Obviously, white real bodies indicate bullishness, while black real bodies indicate bearishness, and their pattern is easily observable in a candlestick chart. 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. 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 It can be illustrated as:
Figure No.: 4.14 Candle-Stick Chart Source: www.metastock.com 4. Point-and-Figure Charts: Point-and-figure charts list only significant price information as columns of X's and O's without regard to time, so that trends, resistance and support levels are more apparent. Although time is depicted on the horizontal axis, the units of time are determined by when the trend changes. There are several ways of constructing point-and-figure charts, but all are based on box size, which is the minimum price differential necessary before a price is recorded as an X or an O. Columns of X's show an uptrend, and O's show a downtrend. Generally, closing price differentials are used. There is no high, low, opening, or closing prices recorded, since only the change in price greater than the box size is recorded as an X if the price differential is up or as an O if it is down. Each consecutive X is recorded in the same column above the previous X until the price reverses by more than the box size, then a new column is started by recording an O in a box below and to the right of the highest X in the previous column. O's are added downward with each price decrease greater than the box size until the downtrend
reverses to an uptrend, starting a new column where the 1st X is placed in the box above and to the right of the last O in the previous column. The construction of point-and-figure charts simplifies the drawing of trend lines, and support and resistance levels, which is why point-and-figure charts are ideal for detecting trends, and determining support and resistance levels. Following is the point-and-figure chart of Intel Corporation. In this chart, the X's are green and the O's are red, which increases their contrast, making patterns more apparent.
Figure No.: 4.15 Point And Figure Chart Source: www.tradestation.com This seems to be the most common type of point-and-figure chart, but there are several variations that differ significantly from the above description. Charts are one of the most fundamental aspects of technical analysis. It is important that one should clearly understand what is being shown on a chart and the information that it provides. 220.127.116.11 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. The theory behind chart patterns is based on the third assumption that is history repeats itself. The idea is that certain patterns are seen many times, and that these patterns signal a certain high probability move in a stock. Based on the historic trend of a chart pattern setting up a certain price movement, chartists look for these patterns to identify trading opportunities.
While there are general ideas and components to every chart pattern, there is no chart pattern that will tell you with 100% certainty where a security is headed. This creates some leeway and debate as to what a good pattern looks like, and is a major reason why charting is often seen as more of an art than a science. There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. 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. 1. Head and Shoulders 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, 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.
Figure no.: 4.16 head and shoulder chart pattern Source: www.metastock.com Figure: Head and shoulders top is shown on the left. Head and shoulders bottom, or inverse head and shoulders, is on the right. Both of these head and shoulders patterns are similar in that there are four main parts: two shoulders, a head and a neckline. 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. It can be 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. 2. Cup and Handle A cup and handle chart is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.
Figure No.: 4.17 Cup And Handle Chart Pattern Source: www.metastock.com As it can be seen in the above figure, the 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. 3. Double Tops and Bottoms This chart pattern is another well-known pattern that signals a trend reversal - it is considered to be one of the most reliable and is commonly used. These patterns are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through. This pattern is often used to signal intermediate and long-term trend reversals.
Figure No.: 4.18 double tops and bottoms chart pattern Source: www.metastock.com In the case of the double top pattern in Figure 3.17, 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. 4. 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 the symmetrical triangle, ascending and descending triangle. These chart patterns are considered to last anywhere from a couple of weeks to several months.
Figure no.: 4.19 triangles chart pattern Source: www.metastock.com The symmetrical triangle in Figure 4 is a pattern in which two trendline 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 pattern where chartists look for a downside breakout. 5. Flag and Pennant These two short-term chart patterns are continuation patterns that are formed when there is a sharp 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 no.: 4.20 Flag And Pennant Chart Pattern SOURCE: www.metastock.com As you can see, 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 trendline, 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 trendline. In both cases, the trend is expected to continue when the price moves above the upper trendline. 6. 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 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 No.: 4.21 Wedge Chart Pattern
Source: www.metastock.com 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 the above figure, we have a falling wedge in which two trend lines 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. 7. Gaps A gap is witnessed very recently when the trade was halted due to upper freeze @ 20%. 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 INR 25 and INR 30 and the next trading period opens at INR 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. 4.7 Technical Indicators Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. Indicators are used as a secondary measure to the actual price movements and add additional information to the analysis of securities. Indicators are used in two main ways: to confirm price movement and the quality of chart patterns, and to form buy and sell signals. There are two main types of indicators: leading and lagging. A leading indicator precedes price movements, giving them a predictive quality, while a lagging indicator is a confirmation tool because it follows price movement. A leading indicator is thought to be the strongest during periods of sideways or non-trending trading ranges, while the lagging indicators are still useful during trending periods.
There are also two types of indicator constructions: those that fall in a bounded range and those that do not. The ones that are bound within a range are called oscillators - these are the most common type of indicators. Oscillator indicators have a range, for example between zero and 100, and signal periods where the security is overbought (near 100) or oversold (near zero). Non-bounded indicators still form buy and sell signals along with displaying strength or weakness, but they vary in the way they do this. The two main ways that indicators are used to form buy and sell signals in technical analysis is through crossovers and 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. Indicators that are used in technical analysis provide an extremely useful source of additional information. These indicators help identify momentum, trends, volatility and various other aspects in a security to aid in the technical analysis of trends. It is important to note that while some traders use a single indicator solely for buy and sell signals, they are best used in conjunction with price movement, chart patterns and other indicators. 4.7.1 Moving Average Convergence Divergence (MACD): 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. MACD= shorter term moving average – longer term moving average 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. As you can see in below figure, 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.
Figure No.: 4.22 Moving Average Convergence Divergence Source: www.metastock.com
4.7.2 RELATIVE STRENGTH INDEX (RSI): It 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 No.: 4. Relative Strength Index Source: www.metastock.com 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. 4.7.3 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. The stochastic oscillator is plotted within a range of zero and 100 and signals overbought conditions above 80 and oversold conditions below 20. The stochastic oscillator contains two lines. The first line is the %K, which is essentially the raw measure used to formulate the idea of momentum behind the oscillator. The second line is the %D, which is simply a moving average of the %K. The %D line is considered to be the more important of the two lines as it is seen to produce better signals. The stochastic oscillator generally uses the past 14 trading periods in its calculation but can be adjusted to meet the needs of the user.
Figure no.: 4.24 Stochastic Oscillator Source: www.metastock.com 4.7.4 THE DOW THEORY The Dow Theory is a major corner stone of technical analysis. It is one of the oldest and best known methods used to determine the major trend of stock prices. It tells about the future prospects regarding a particular stock. It indicates the direction of the price of the share by looking in to which an investor can think for investment on that particular stock. Seven Basic Principles of Dow's Theory: 1.Everything is discounted by the price Averages, specifically, the Dow-Jones Industrial Average and the Dow-Jones Transportation Average. Since the Averages reflect all information, experience, knowledge, opinions, and activities of all stock market investors, everything that could possibly affect the demand for or supply of stocks is discounted by the Averages. 2.There are three trends in stock prices. 1) The Primary Tide is the major long-term trend. But no trend moves in a straight line for long, and 2) Secondary Reactions are the intermediate-term corrections that interrupt and move in an opposite direction against the Primary Tide. 3) Ripples are the very minor day-to-day fluctuations that are of concern only to short-term traders and not at all to Dow Theorists. 3. Primary Tides going up, also known as Bull Markets, typically unfold in three up moves in stock prices. The first move up is the result of far-sighted investors accumulating stocks at a time when business is slow but anticipated to improve. The second move up is a result of investors buying stocks in reaction to improved fundamental business conditions and
increasing corporate earnings. The third and final up move occurs when the general public finally notices that all the financial news is good. During the final up move, speculation runs rampant. 4. Primary Tides going down, also known as Bear Markets, typically unfold in three down moves in stock prices. The first move down occurs when far-sighted investors sell based on their experienced judgement that high valuations and booming corporate earnings are unsustainable. The second move down reflects panic as a now fearful public dumps at any price the same stock they just recently bought at much higher prices. The final move down results from distress selling and the need to raise cash. 5. The two averages must confirm each other. To signal a Primary Tide Bull Market major trend, both averages must rise above their respective highs of previous upward Secondary Reactions. To signal a Primary Tide Bear Market major trend, both the Dow-Jones Industrial Average and the Dow-Jones Transportation Average must drop below their respective lows of previous Secondary Reactions. A move to a new high or low by just one average alone is not meaningful. Also, it is not uncommon for one average to signal a change in trend before the other. The Dow Theory does not stipulate any time limit on trend confirmation by both averages. 6. Only end-of-day, closing prices on the averages are considered. Price movements during the day are ignored. 7. The Primary Tide remains in effect until a Dow Theory reversal has been signaled by both averages. It can act as an yardstick to choose the growing stocks and investing in those in anticipation of future profits. 4.7.5 The Short Interest Ratio Theory The Short Interest Ratio is derived by dividing the reported short interest or the number of shares sold short, by the average volume foe about 30 days. When short sales increase relative to total volume, the indicator rises. A ratio above 150% is considered bullish, and a ratio below 100% is considered bearish. The logic behind this ratio is that speculators and other investors sell stocks at high price in anticipation of buying them back at lower prices. Thus, increasing short selling is viewed as a
sign of general market weakness, and short covering (as evidenced by decreasing short positions) as a sign of strength. An existing large short interest is considered a sign of strength, since the cover (buying) is yet to come; whereas an established slight short interest is considered a sign of weakness (more short-sells are to come). 4.7.6 The Confidence Index It is the ratio of a group of lower-grade bonds to a group of higher-grade bonds. According to the theory underlying this index, when the ratio is high, investors‟ confidence is likewise high, as reflected by their purchase of relatively more of the lower-grade securities. When they buy relatively more of the higher-grade securities, this is taken as an indication that confidence is low, and is reflected in a low ratio. 4.7.7 SPREADS Large spread between yields indicate low confidence and are bearish; the market appears to require a large compensation for business, financial and inflation risks. Small spreads indicate high confidence and are bullish. In short, the larger the spreads, the lower the ratio and the less the confidence. The smaller the spreads, the greater the ratio, indicating greater confidence. 4.7.8 THE ADVANCE-DECLINE RATIO The index-relating advance to decline is called the Advance-Decline Ratio. When advances persistently out number declines, the ratio increases. A bullish condition is said to exist, and vice-versa. Thus, an Advance-Decline Ratio tries to capture the market‟s underlying strength by taking in to account the number of advancing and declining issues.
4.7.9 THE MARKET BREADTH INDEX The Market Breadth Index is a variant of the Advance-Decline Ratio. To compute it, we take the net difference between the number of stocks rising and the number of stocks falling, added (or subtracted) to the previous. For example, if in a given week 600 shares advanced, 200 shares declined, and 200 were unchanged, the breadth would be 2 i.e., (600-200)/200. The figure of each week is added to previous week‟s figure. These data are then plotted to establish the pattern of movement of advance and decline.
The purpose of the Market Breadth Index is to indicate whether a confirmation of some index has occurred. If both the stock index and the market breadth index increase, the market is bullish; when the stock index increase but the breadth index does not, the market is bearish. 4.7.10 THE ODD-LOT RATIO Odd-lot transactions are measured by odd-lot changes in index. Odd-lots are stock transactions of less than, say, 100 shares. The Odd-lot ratio is sometimes referred to as a yardstick of uniformed sentiment or an index of contrary opinion, because the odd-lot theory assumes that small buyers or sellers are not very bright especially at tops and bottoms when they need to be the brightest. The Odd-lot ratio theory assumes that the odd-lot short sellers are even more likely to be wrong than odd-lotters in general. This indicator relates odd-lot sales to purchases. 4.7.11 INSIDER TRANSACTIONS The hypothesis that insider activity may be indicative of future stock prices has received some support in academic literature. Since insiders have the best picture of how the firm is faring, some believers of technical analysis feel that these inside transactions offer a clue, to future earnings, dividend and stock price performance. If the insiders are selling heavily, it is considered a bearish indicator and vice versa. Stockholders do not like to hear that the president of a company is selling large blocks of stock of the company. Although the president‟s reason for selling the stock may not be related to the future growth of the company, it is still considered bearish as investors figure the president, as an insider, must know something bad about the company that they, as outsiders, do not know.
4.7.12 THE CREDIT-BALANCE THEORY Typically, investors receive credit balances in their accounts at their brokerage houses when they sell stock. At this point the investor has two choices: he can either have the credit balance forwarded to him or leave the credit balance in the account. However, these balances frequently earn no interest. Thus, the only reason for maintaining the credit balance in the account would be for purposes of reinvestment of these funds in the very near future. Some feel that a build-up in these cash balances represent large reserve of potential buying power. In effect, investors are leaving the credit balances in their brokerage firm accounts because they anticipate a drop in prices, thus a buying opportunity. Conversely, a drop in
credit balance suggests that prices will go up. Because, an increase in prices was expected, investors have already used up their credit balances. However, Technicians feel that investors in general, as their actions get reflected in credit balances are usually wrong; that is, the investors are buying stocks when they should be selling them and selling stocks when they should be buying. As such, the credit balance theory is a contrary opinion theory. In other words, technicians suggests that wise investor will buy stocks as credit balances are rising and sell stocks as credit balances are dropping. In short technicians say the wise investor should do the opposite of what the credit balances are doing. 4.7.13 PERFORMANCE OF LINKED MARKETS For an investor, the performances of the markets play a vital role to estimate the future performance of the market in which it trades in. If relative markets show a positive performance it can be anticipated that the market will go positively. If it shows a downward trend, it can be anticipated that the market will take a down turn. Generally, for Indian investors the NASDAQ, DOWZONES and Singapore have a much relation to guard their decisions to anticipate the future market tendency. 4.8 SUMMARY •
Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity. It is based on three assumptions: 1) the market discounts everything, 2) price moves in trends and 3) history tends to repeat itself.
Technicians believe that all the information they need about a stock can be found in its charts.
Technical traders take a short-term approach to analyzing the market.
Criticism of technical analysis stems from the efficient market hypothesis, which states that the market price is always the correct one, making any historical analysis useless.
One of the most important concepts in technical analysis is that of a trend, which the general direction that a security is headed is. There are three types of trends: Uptrends, downtrends and sideways/horizontal trends.
A trendline is a simple charting technique that adds a line to a chart to represent the trend in the market or a stock.
A channel, or channel lines, is the addition of two parallel trendlines that act as strong areas of support and resistance.
Support is the price level through which a stock or market seldom falls. Resistance is the price level that a stock or market seldom surpasses.
Volume is 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.
A chart is a graphical representation of a series of prices over a set time frame.
The time scale refers to the range of dates at the bottom of the chart, which can vary from decades to seconds. The most frequently used time scales are intraday, daily, weekly, monthly, quarterly and annually.
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. It can be either linear or logarithmic.
There are four main types of charts used by investors and traders: line charts, bar charts, candlestick charts and point and figure charts.
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of future price movements. There are two types: reversal and continuation.
A head and shoulders pattern is reversal pattern that signals a security is likely to move against its previous trend.
A cup and handle pattern is a bullish continuation pattern in which the upward trend has paused but will continue in an upward direction once the pattern is confirmed.
Double tops and double bottoms are formed after a sustained trend and signal to chartists that the trend is about to reverse. The pattern is created when a price movement tests support or resistance levels twice and is unable to break through.
A triangle is a technical analysis pattern created by drawing trendlines along a price range that gets narrower over time because of lower tops and higher bottoms. Variations of a triangle include ascending and descending triangles.
Flags and pennants are short-term continuation patterns that are formed when there is a sharp price movement followed by a sideways price movement.
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 direction.
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.
A moving average is the average price of a security over a set amount of time. There are three types: simple, linear and exponential.
Moving averages help technical traders smooth out some of the noise that is found in day-to-day price movements, giving traders a clearer view of the price trend.
Indicators are calculations based on the price and the volume of a security that measure such things as money flow, trends, volatility and momentum. There are two types: leading and lagging.
The accumulation/distribution line is a volume indicator that attempts to measure the ratio of buying to selling of a security.
The moving average convergence divergence (MACD) is comprised of two exponential moving averages, which help to measure a security's momentum.
The relative strength index (RSI) helps to signal overbought and oversold conditions in a security.
The stochastic oscillator compares a security's closing price to its price range over a given time period.
CHAPTER-5 A SAMPLE SURVEY 5.1 OBJECTIVES OF THE SURVEY The survey has been carried out in order to find out: Whether people invest in stock market? How much returns one expects by investing in stock market? Whether investors believe in Technical Analysis and/or Fundamental Analysis? Do people use Technical Indicators at the time of investment decision-making? Do Technical Analysis better than Fundamental Analysis as an indicator? 5.2 SAMPLE COMPOSITION In all 220 persons were interviewed. 20 out of them revealed that they don‟t have any interest in securities market. Therefore, those respondents were not considered for answering the questionnaire. The remaining 200 thereby formed the sample size of this survey.
1. Age Composition 20-30
More than 60
20-30 30-40 40-60 More than 60
2. Occupation SelfEmployed
Self-Employed Salaried Student Govt. Employee Retired Others
3. Income Level (Per Month) Less Than
Rs. 5,000 to
Rs. 10,000 to
Rs. 25,000 to
Less Than Rs. 5,000 Rs. 5,000-Rs. 10,000 Rs. 10,000-Rs. 25,000 Rs. 25,000-Rs. 50,000 Rs.50,000 and Above
5.3 OUTCOMES OF THE SURVEY Following are the outcomes that have been revealed from the survey: 1. PEOPLE WHO INVEST IN STOCK MARKET As a part of this study it was found that out of 200 people 147 people invest in stock market where as the rest 53 has no believe on the stock market. Invest
Do not Invest
Invest Do not Invest
2. RETURN EXPECTED PER ANNUM Out of 200 people that invest in stock market, most of the investors i.e., 102 in number expect a return of 20-50 percent per annum, where as 65 investor expect a return of more than 50% p.a. 21 investors like 10-20 percent return per annum and 12 person who is satisfied with an expected return of less than 10% p.a. Less Than
Less Than 10% 10% - 20% 20%-50% More Than 50%
3. STOCKS IN WHICH INVESTORS PREFER TO INVEST IN Out of 200 investors, 127 investors used to invest in midcap stocks, 54 in blue-chips and not a single investor in penny shares. It indicates that most of the investors have a strong believe on midcap stocks. Blue
Blue Chip Mid Cap Penny Shares All
4. INVESTORS TRADING INTRADAY Out of 200 investors, 118 investors practice intraday where as 82 don‟t want to take much risk by doing intraday trading. Practice
Practice Don't Practice
5. ANALYSIS INVESTORS BELIEVE UPEN It was revealed that a major portion of the investors believe in both Technical Analysis as well as in Fundament Analysis as 84investors believe on both.
Fundamental Analysis Technical Analysis Both None
6. INVESTORS BELIEVE ON DOW-THEORY An average number of investors believe on the Dow-Theory i.e., 12 where as 10 do not. Use
Use Don't Use
7. TYPE OF CHART USED BY INVESTORS The Candle-stick chart is very popular by investors while analyzing the market condition as 55 out of 200 investors rely on that. The major thing is that 55 investors believe on all the four types of charts where as 18 investor never use any of the charts to analyze.
Point & Figure
Line Chart Bar Chart Candle Stick Chart Point & Figure Chart All Non
8. INVESTORS TRADE IN DERIVATIVES Relatively more than the average investors used to invest in derivative instruments as 127 love to invest in derivatives out of 200
Trade Don't Trade
9. TYPE OF DERIVATIVE INVESTORS INVEST IN Out of 127 investor those invest in derivatives, most of the investors like to invest in Index options as compared to other derivative instruments. The statistics shows that, out of 127 investors trading in derivatives, 45 invest in Index Options, 9 invest in Stock Options, one in Stock Futures and 9 invest in Index Futures. 37 investors invest in all the four types of derivatives. Index Futures
Index Futures Index Options Stock Futures Stock Options All
10. IS TECHNICAL ANALYSIS AN INDICATOR FOR INVESTMENT DECISIONMAKING ? From the study, it was found that out of 200 people 126 treat the Technical Analysis as an indicator for investment decision making but 60 people did not agree on that. Some 14 people were unable to decide whether Technical Analysis is an indicator or not.
As most of the people have the opinion that Technical Analysis indicates the market behavior, it can be accepted that Technical Analysis is an indicator for investment decision making.
5.4 OPINION OF THE INVESTORS During the survey, different investors have shared different views regarding investment. The discussions and question answer sessions with them revealed lots of practical trading and investing strategies that can help one to take appropriate investment decisions at the right time and at the right way. Some of the most discussed and suggested tips of investment and day-trading are as follows: 1. Check buying volumes Before buying check out the buying and selling quantity (volumes). If buying volume started increasing then the stock may go up and if selling volumes start increasing the stock price may come down. 2. Check derivative status If possible try to check out the derivative of the stock which you want to trade. If derivative of that particular stock is going up with increasing buying volumes then you can immediately grab (buy) that share/stock. Most of the time it is seen that, if the derivative price goes up, then its share price also goes up. 3. Wait for the target price to buy For example, if buy is given at 150.5 then don‟t buy below this price, only buy at 150.5 price or slightly higher than price. Because the given buy price may be the resistance price, if it breaks then share price goes up or else may not go up above 50.5. So plan to buy at given targeted price, don‟t buy below target price. 4. Strictly maintain Stop Loss Strictly maintain the given stop losses. This will help you to minimize your further losses. Suppose for moment the share you bought falls drastically down, then you may end up with huge loss. So always maintain given stop loss. “Stop Loss will reduce your loss”. 5. Down wait for huge profit in single share/trade If you are getting some profit and if you notice that is not further moving up (it‟s called consolidation) then you can sell your share/stock and come out of that trade. In this manner, you can earn small profit instead of loss then you can do another trade and again earn small profit. Likewise if you keep earning couple of small profits in a single day then all your
small profits will add up to huge profit amount in a single day. “Get satisfied in small profit and do multiple trades”. 6.Don’tOvertrade First and very important is not to Overtrade - Never put all your money/savings in share market. Most of the brokers provide margin amount but it is up to you how to make use of this margin amount. Most of the traders make use of this margin amount for over trading which is risky. 7. Wait, Watch and Trade Do not jump in market early. Wait, watch and trade. Confirm the market direction and make sure and confirm all your strategies like resistance and support levels and then plan to trade. 8. Study tips carefully Do not react to tips given by anyone - First observe that stock, check the volume, where they are increasing or decreasing and then decide your trade. Do not buy or sell blindly based on share tips. Most of the share tips do not work if market direction changes. 9. Always go with Market trend Don‟t short sell, if the market is going up and don‟t buy if the market is falling down. Trade with market direction and don‟t go against market direction. 10. Try to minimize your Loss and increase profit Get ready to accept loss if you do wrong trade - Come out of your trade if you have entered in wrong time by accepting loss instead of waiting for trade to reverse and finally it is coming down from top means it is cooling, if you see more buyer than seller then you can hold your position. You must know which share has what momentum, means if the share price is Rs.120 then you can expect upside from Rs.1 to 5 and not Rs.50 to 100. If the scrip is going up, it will go in ladder fashion, it will go up and it will come down bit and it will again continue its upward journey. 11. Wait for opportunity If you are not sure about market movement then watch and wait for opportunity don‟t trade forcefully. Some times market move in range bound means market move up-down in very small range at that time it becomes very difficult to judge the market direction and do intraday trading. Its always better to wait instead of losing money.
12. Don’t expect too much Don‟t expect too much - Be happy in whatever profit you get, don‟t try to grab too much from market. Be realistic, and don‟t expect too much. It can be remembered that while doing day trading, you should square off your positions with appropriate profit instead of waiting for big profit. 13. Advice for high returns Lack of Knowledge is very risky and very dangerous, so don‟t do trading or investing without having proper knowledge. Read books, refer websites and get prepared before you plan for share market trading or investing.
CHAPTER-6 CONCLUSION AND SUGGESTIONS 6.1 FINDINGS: From this study one can able to extract out the fundamental aspects of Technical Analysis as well as its applicability. Some of the major findings of the study are mentioned below: 1) Unlike Fundamental Analysis, Technical Analysis is also very much important to play in the stock market. 2) Fundamental Analysis tells about “right choice” where as Technical Analysis tells about the “right time” to enter or exit from the market. 3) Technical Analysis assumes that history tends to repeat itself, but it is not wise to believe that the same trend will occure next. 4) Support and Resistance levels are the levels at which a lot of traders are willing to buy the stock or sell it. So, an investor has to keep its eyes and ears open at this point of time. 5) Among the various types of charts the Candle-Stick Chart is the most effective and acceptable tool to evaluate the performance of a stock and forecast the future. 6) When an investor looks in to the numerous types of chart patterns, it creates a lot of confusion and expectations in the minds of the investors. 7) The Moving Average Convergence Divergence (MACD) is the most well known and used indicator in Technical Analysis as it is based on real facts of past performance. 8) In trading, volumes have equal importance along with price to confirm the formulation of a trend or a technical pattern. With the help of volumes we can easily determine whether the demand side is greater or supply side is greater for stocks at any given point of time. 9) In Bhubaneswar, most of the investors are risk-averse in nature. People hesitate to invest in derivatives by taking much risk. 10) Most of the investors are not aware of the sophisticated and well designed tools of technical analysis. They invest without going through the technical analysis. 11) Though Technical Analysis plays a lion‟s role to decide investment pattern as Fundamental Analysis, it cannot be treated as a substitute to Fundamental Analysis.
By going through the subject matter, analysis, opinion of the respondents and the findings, the following points can be suggested for the purpose of further reference and implementation: 1) Technical analysis is a game of charts and figures. So, at the time of taking any decision regarding investment, Fundamental Analysis and other factors should also be taken in to consideration along with Technical Analysis. 2) Instead of looking in to all chart patterns, it is good to follow a single chart pattern and to draw timely conclusion by interpreting that. 3) Market never tells anything of its own! It‟s the investor who has to look in to the market and catch up the indicator to forecast and expect the market trend. 4) Most of the investors assume that by using charts and patterns, they can earn much by purchasing in low and selling at high prices. But, it is not so easy as they think. So, such believes should be rooted out from mind before looking towards market. 5) As we have a globalised market, along with the domestic market the performance of the overseas markets should also be considered and the help of modern financial instruments should be taken to reduce risk and maximize the probability of gaining more. 6) And, as per Apollo Sindhoori Capital Investments Ltd. Is concerned, there is an ample scope to expand and increase its revenue in this post-recession-recovering market. So, the organisation has to look in to its service-providing-skills and problems to attract more customers in the market. Although it has a good brand name, still it has to go for optimum advertisement and well skilled human resources.
6.3 CONCLUSION: A large number of new investors think that there is easy and quick money in investing and day trading. They think that they can buy at bottoms and sell at tops very easily. They thing that since they can analyse the chart patterns and use technical analysis very well, they can trade consistently with 90% accuracy. They think that they can invest small amount and trade for large amounts to earn big profits by utilizing multiple exposure on their margin amount and fail to understand the real market behavior. They fail to understand that investing is not like “GO…..STOP” game. Here, only disciplined investors well equipped with sophisticated technical tools having presence of mind can sustain and make the indices favourable for them irrespective of market trends whether bull or bear. The only thing that matters in investment is “Right Time and Right Choice” which can be tamed through proper analysis and understanding of the whole game as the NSE has rightly narrated…. There are no secret formulas to succeed in the markets and players have to adapt constantly to the changes the market throws at them. ”Success is simple. Do what's right, the right way, at the right time.”
“ SOCHKAR, SAMAJHKAR, INVESTKAR”
BIBLIOGRAPHY: 1. Bhat, Sudhindra: Security Analysis And Portfolio Management, Excel Books, First Edition, 2008 2. Singh, Preeti: Investment Management, Himalaya Publishing House, 14th Edition, 2006 3. Chandra, Prasanna: Investment Analysis And Portfolio Management, Tata Mcgraw Hill Pub. Co. Ltd. 4. Fischer, Donald E. and Jordan, Ronald T.: Security Analysis And Portfolio Management, Pearson, Prentice Hill, 16th Edition, 2006
WEBLIOGRAPHY: To complete this study the following Internet portals have helped a lot: 1. www.destimoney.com 2. www.moneycontrol.com 3. www.trending123.com 4. www.investopedia.com 5. www.sharevyapaar.com 6. www.nseindia.com 7. www.myiris.com 8. www.wikipedia.com 9. www.metastock.com 10. www.findarticles.com 11. www.tradestation.com 12. www.stockcharts.com 13. www.traderslog.com 14. www.learningmarkets.com 15. www.thismatter.com 16. www.bseindia.com
QUESTIONNAIRE FOR THE SURVEY
1.Name of the Respondent:______________________________________________ 2. Please specify your gender. Male Female 3. Please select your age group. Below 30 30-60 60 & above 4. Please specify your martial Status Unmarried Married 5. Please specify your employment details Salaried Business Retired (others) Brand 6. Would you like to mention your monthly earnings? Up to 10000 10001-30000 30000 & above 7. Please specify your educational detail. Under Graduate Graduate Post Graduate & above
8. What is your occupation? Accounts, Finance & Investment
9.you invest in stock market?
10. If yes, how much money you have invested? Rs.____________________ 11.How much return you expect from your investment? Rs.____________________ 12.How many years you have experienced in stock market?
13.How many years you have experienced in stock market?
14.Which stocks you prefer to invest in? a)Blue Chip
15.Do you practice Short-selling or Intraday?
16. What is your risk tolerance level for short term fluctuations in your invested money in case of equity investments? Very low____________________________________1 Low________________________________________2 Moderate____________________________________3 High_______________________________________4 Very high__________________________________ 5
17. What is your attitude towards the following Financial Instruments, in the Indian Capital Market? (Please mark the suitable option) Highly
Some What Not Favourable
a) Shares b)Debentures c)Mutual Funds d)Bonds
18. What is your level of financial knowledge about the various investment avenues in the market? Excellent____________________________________1 Good_______________________________________2 Moderate____________________________________3 Not much___________________________________4 Very low____________________________________5 19. What are the various sources of investment information for you? Newspapers/Magazines Electronic Media (T.V.) Peer group/Friends Broker/Financial advisor Internet
20.Which analysis you believe upon? a)Fundamental
21.If you believe on Fundamental Analysis;
a) You do Economic analysis?
b) You do Industry analysis?
c) You do Company analysis?
If you believe on Technical Analysis;
Do you use Dow Theory?
Which type of chart you prefer for analysis? i) Line Chart
iii)Candle Stick Chart
iv)Point &Figure Chart
23.Do you trade in Derivatives?
If yes; in which section? a)Stock Futures
24. Do you think Technical Analysis is better than Fundamental Analysis?
25. Do you treat Technical Analysis as a compass to forecast and foresee the right direction of the stock market?
Signature of the Respondent Date: