BASICS - TECHNICAL ANALYSIS
Understanding psychology behind stock markets…
Bangalore Investors Group - Discussion Meeting
2 July 2017
By Vivek Mashrani
[Link]@[Link]
@MashraniVivek
Discussion Topics
• Market building blocks and market cycles
• Human psychology – Greed and Fear
• Time horizons and Trends
• Complementing with Fundamental analysis
• Underlying thesis of Technical analysis
• Types of charts
• Key indicators
• How I use Technical Analysis
• Examples
Market building blocks
Traders and Speculators
Investors
Arbitrageurs
Market pre-empts fundamental data
Is market always rational?
Identifying trend is important
Foundation of Technical Analysis…
“Since all human actions obey laws, as fixed as those of geometry,
psychology should be studied in geometrical form, and with
mathematical objectivity…”
- Spinoza
Does history repeat? – Fibonacci and nature
[Link]
Eliot wave theory – cloning the human nature…
x/y = 0.618
y/x = 1.618
z/x = 2.618
Reciprocal of
2.618 = 0.382
Dow theory and technical analysis premises
Price discounts everything
Price movements are not totally random
WHAT is more important than WHY
Market action discounts everything >> Demand - supply
Price moves in trends
History repeats itself
To materialize information – one has to put money
on the table…
Technical analysis gives strong indications of action based on insider information ahead of news
Examples: Volume spurts, sudden break-outs, moving averages, momentum
Three pillars of technical analysis
TREND PRICE VOLUME
Results in change in demand and supply…which is captured by TECHNICAL ANALYSIS…
It’s a confluence of demand and supply - WAR
Bearish engulfing
Doji pattern
Time horizons and Trends
Long • Growing GDP expectations
Medium • GST impact expectations
Short • Result season expectations
Unfortunately most technical analysts only focus on intra-day and short term…!!!
TRENDLINES
• A TRENDLINE is a straight line that connects two or more low or high price points
and then extends into the future to act as a line of support or resistance
Downtrend Uptrend Sideways
Complementing with fundamental analysis…
Mean reverting • Cyclical sectors like metals, agro, sugar, tea etc.
Trending upwards • Compounders which has long term upward trend
Trending downwards • Junk stocks like Suzlon, JP associates, Unitech etc.
Common dilemma in fundamental analysis: Selling too early; Not riding the trend
Valuation remaining expensive for prolonged period of time
Technical analysis adds additional dimension for buying and selling stocks
Type of charts
• Line chart
• Candlesticks chart
• Bar chart
Key indicators
• Support and Resistance lines
• Trend lines and Bollinger bands
• Fibonacci retracements
• Moving averages
• Momentum indicators
• Continuation and Reversal patterns
• Gaps
• Various combinations – VERY POWERFUL!!
The way I use Technical Analysis…
• Blend with Fundamental analysis; We know the story – Technical
analysis helps identify trigger to this story (people call it
INFLECTION POINT these days!!)
• Have 70-80% core portfolio; 20-30% tactical which is used for short
term play + Technical triggers + IPOs + Buybacks etc.
• Periodically verify for long term trends for core portfolio
(Fundamental analysis - we say HEADWINDS and TAILWINDS!!)
• Look for long term break-outs, reversal patterns to see any twist in
story (Fundamental analysis – we say TURNAROUND STORIES!!)
It is very much possible to use Technical Analysis for long term investing!!
Examples
Like we try to find Multi-baggers in Fundamental analysis…there
are profitable situations we need to find in Technical analysis…
BEPL – strong break-outs
Shilpi Cable – almost all bearish signals!!
Vedanta – Trend repeats in cyclical stocks
V-Guard – Simple channel + volume breakout
Sunteck Realty – Triggers for when to buy the trend!!
United Spirits – Technical spirits screaming to sell!!
Suggested further readings & tools (with hyperlinks)
Introduction to Technical analysis by Martin Pring
Technical analysis of stock trends by Robert Edwards
Japanese Candlestick charting by Steve Nison
References
• Credit Suisse – Global Technical Research
• Karvy on Technical analysis
• Technical analysis explained by Martin Pring
• [Link]
• [Link] (like a screener)
• Notes of my Guru Prof. Sanjay Ved
• [Link]
DISCLAIMER
• This presentation is solely for discussion and knowledge sharing
purpose
• Examples shown are for understanding concepts and should not be
considered as stock recommendations
• Please do your own research and due diligence for any investment
actions and/or consult an investment advisor for the same
• Author is not liable for any claims arising from use of the data
provided neither there is any guarantee for accuracy of data
• I have no vested interest in the tools that have been recommended;
These are the ones I am comfortable using them