Module -4

Prof. Rajimol KP, Atria IT 1

Fundamental & Technical Analysis: Macro-Economic
and Industry Analysis: Fundamental analysis-EIC
Frame Work, Economy Analysis, Industry Analysis,
Company Analysis- Financial Statement Analysis.
Market Efficiency: Efficient Market Hypothesis, Forms
of Market Efficiency, Empirical test for different forms
of market efficiency. Technical Analysis – Concept,
Theories- Dow Theory, Eliot Wave theory. Charts-
Types, Trends and Trend Reversal Patterns.
Mathematical Indicators –Moving Average
Convergence-Divergence, Relative Strength Index
(Theory only).

Prof. Rajimol KP, Atria IT 2

Prof. Rajimol KP, Atria IT 3
• Fundamental analysis attempts to
identify stocks offering strong growth
potential at a good price by examining
the underlying company's business, as
well as conditions within its industry or in
the broader economy.
• It is the examination of various factors
such as earnings of the company, growth
rate and risk exposure that affects the
value of shares of a company.

Prof. Rajimol KP, Atria IT 4

Prof. Rajimol KP, Atria IT 5
Prof. Rajimol KP, Atria IT 6
Market Efficiency

• Market efficiency refers to the ability possessed by markets to include

information that offers maximum possible opportunities for traders to
buy and sell securities without incurring additional transaction costs.
The concept of market efficiency is closely linked to the efficient
market hypothesis (EMH).

Prof. Rajimol KP, Atria IT 7

Prof. Rajimol KP, Atria IT 8
Empirical test for different forms of market efficiency

Prof. Rajimol KP, Atria IT 9

Empirical test for different forms of market efficiency

Prof. Rajimol KP, Atria IT 10

Empirical test for different forms of market efficiency

Prof. Rajimol KP, Atria IT 11

Empirical test for different forms of market efficiency

Prof. Rajimol KP, Atria IT 12

Empirical test for different forms of market efficiency

Prof. Rajimol KP, Atria IT 13

• Random walk theory states that stock prices
are random, so that past movement or trend
of a stock price or market cannot be used to
predict its future movement.

• This means that stock prices move

unpredictably, so that past prices cannot be
used to accurately predict future prices.
Random walk theory also implies that the
stock market is efficient and reflects all
available information.

Prof. Rajimol KP, Atria IT 14

• Technical analysis is a tool, or method,
used to predict the probable future price
movement of a security – such as
a stock or currency pair – based on
market data.
• Technical traders believe that current or
past price action in the market is the
most reliable indicator of future price
action.

Prof. Rajimol KP, Atria IT 15

Prof. Rajimol KP, Atria IT 16
• Dow Theory is a technical analysis approach to
investing.
• It was developed by Charles Dow, the founder of
the Dow Jones and Company.
• The Dow theory was developed to explain the
concept that share market moves in trends that can
be analysed and predicted.
• Dow Jones theory provides a framework for
understanding market behaviour and making
informed investment decisions.

Prof. Rajimol KP, Atria IT 17

The Three Trends in Dow Theory

• The Primary Trend

• The Secondary Trend
• The Minor Trend

Prof. Rajimol KP, Atria IT 18

Eliot Wave Theory
• The Elliott Wave Theory is a form of technical analysis that looks for
recurrent long-term price patterns related to persistent changes in
investor sentiment and psychology.
• The theory identifies impulse waves that set up a pattern and
corrective waves that oppose the larger trend.
• Each set of waves is nested within a larger set of waves that adhere to
the same impulse or corrective pattern, which is described as a fractal
approach to investing.

Prof. Rajimol KP, Atria IT 19

Eliot Wave Theory

Prof. Rajimol KP, Atria IT 20

Types of Charts used in Technical Analysis
• Line Charts: Connect closing prices over time to show basic
price movement. Line chart helps visualize the overall trend and
direction but lacks detailed price information.

Prof. Rajimol KP, Atria IT 21

• Bar Charts: Show open, high, low, and close for each period. Bar
charts provide more price data than a line chart. The top
represents the high, the bottom is the low, and the horizontal
lines on the left and right are open and closed.

Prof. Rajimol KP, Atria IT 22

• Candlestick Charts: Resemble bar charts but use boxes called
‘candles’ to show price range and closing price. Candlesticks are
colored to indicate if the price rose or fell in that period. Considered
to provide the most insight into price action.
• White=[Link]>Op. Price-Bull
• Black = [Link]>Op. Price-Bear
• Doji = Cl. Price = Op. Price

Prof. Rajimol KP, Atria IT 23

• Point and Figure Charts: Plot price movements without regard
to time. Column X shows rising prices, and column O shows
falling prices. Filter out non-meaningful price moves and focus
on direction and reversals.

Prof. Rajimol KP, Atria IT 24

• Renko Charts: Similar to point and figure charts, but plots bricks
in unit increments when the price reaches specified targets.
Bricks are colored for rising and falling in renko charts. Filters
noise and highlights trends.

Prof. Rajimol KP, Atria IT 25

 Trend
• Trend refers to the direction in which the price of a stock is moving.
Share prices usually move upwards or downwards based on bullish or
bearish market sentiments. Usually, they do not move in a straight
line as stock prices can be subject to high volatility in the short term.

Prof. Rajimol KP, Atria IT 26

Trend Reversal
• A trend reversal is a change in the direction of the price trend of an
asset. This change in direction can be to the upside or downside.
• A trend reversal signals the end of one trend and the beginning of
another.

Prof. Rajimol KP, Atria IT 27

 Technical Analysis Indicators
1. Volume of Trade
• Volume expands along with the bull market and narrows down in the
bear market.
• Technical analyst use volume as an excellent method of confirming the
trend.
2. Breadth of the Market
The net difference between the number of stock advanced and declined
during the same period is the breadth of the market.
A cumulative index of net differences measures the market breadth
3. Short Sales
It refers to the selling of shares that are not owned.
Prof. Rajimol KP, Atria IT 28
Technical Analysis Indicators
4. Moving Average
A moving average (MA) is a stock indicator commonly used in technical
analysis, used to help smooth out price data by creating a constantly
updated average price. A rising moving average indicates that the
security is in an uptrend, while a declining moving average indicates a
downtrend.

Prof. Rajimol KP, Atria IT 29

Technical Analysis Indicators
5. Oscillators
Oscillator shows the share price movement across a reference point
from one extreme to another. The momentum indicates:
• Overbought and oversold conditions of the scrip or the market.
• Signaling the possible trend reversal.
• Rise or decline in the momentum.

Prof. Rajimol KP, Atria IT 30

Technical Analysis Indicators
6. Relative Strength Index (RSI)
Identifies the inherent technical strength and weakness of a particular
scrip or market. RSI can be calculated for a scrip by adopting a
following formula
If the share price is falling and RSI is rising, a divergence is said to have
occurred. Divergence indicates the turning point of the market.

Prof. Rajimol KP, Atria IT 31

Technical Analysis Indicators
7. Rate of Change (ROC)
• ROC measures the rate of change between the current price and the
price ‘n’ number of days in the past.
• ROC helps to find out the overbought and oversold positions in a
scrip.

Prof. Rajimol KP, Atria IT 32

Prof. Rajimol KP, Atria IT 33