21

221 DIFFERENCE BETWEEN FUNDAMENTAL&

TECHNICAL ANALYSIS Para 6.2
aaes for a fairly long period of time.
specially speculators who do not want However
io invest
there are many investors,
horizon is short lerm and hence they want for long. Their investmnent
iaey short term. This chapter deals to predict stock
prices in rela-
with the second
valuation- Technical analysis,. approach of securily
6.1 TECHNICAL ANALYSIS
Technical analysis is based on the premise that
hence movement stock prices lollow an
in "history repeats itself" and
oauged from past price and volume established trend which can be
data. As per
price behaviour can be Technical Analysis future
analvsis involves predicted
on the
the study of various basis past price analysis. Technical
of
future direction of stock prices. It charts, ratios and
helps in answering the patferns to predict
the right time to buy a share?" or "Is it the questions like "Is it
ce it is decided to right time to sell a share?"
Hence
of
invest in
the shares
timing investment can be decided on the
of a
particular the
company,
basis of technical right
analysis.
6.2DIFFERENCE BETWEEN FUNDAMENTAL
TECHNICAL ANALYSIS ANALYSIS AND
Two approaches to security valuation-fundamental analysis and
analysis can be distinguished on the following basis technical
() Meaning and basic philosophy As per
share
:
fundamental analysis, the
price should be equal to its intrinsic value in long term. Intrinsic
value of a share is equal to the
present value all future expected cash
inflows from the share. Technical
analysis based on the
is
thathistory repeats itself' and hence stock prices can be premise
based on past price and volume data. The basic predicted
philosophy
fundamental analysis is that every security has a real [Link]
If its
priceis less thanits real worth then an investor can
by investing in it. On the other hand, the basic superior
earn
returns
of Technical analysis is that the share philosophy
prices move in trends and
patterns which can be exploited by investors to predict near future
price movements.
(i) Objectives : In case of fundamental
analysis the main objective is to
determine the intrinsic value (or true worth) of a security. The main
objective of Technical analysis is to identify future trend in security
prices.
(1) Source ofinformation: Fundamental analysis is based on the infor
mation related to Economy, industry and company fundamentals. Elc
iramework is the backbone of fundamental analysis. The information
 TECHNICAL ANALYSIS
Para 6.2
222
regardingeconomy and industry is oblained from governmer
Information regarding company analysis isPor
epon
and database.
rom the annual financialstatementsof the company concern [Link]
we do not use stock price Technical analysis
data to analyse a stock. Technical: e

is based on the analysis of past lume datas

stock prices and volume dataysi
as (,
technical analysis requires inforr to
predict future prices. Hence
which is easily availablelrom the stock market [Link] and vol aton
Thercfore sometimes it is said ental analysis
that fundamental analysis is based
is based data
data which is
external data while technical analysis
on
on
internal to stock market.

information Both analysis

fundamental and toL
(i1) Types of
analysis are primarily based on secondary data. But in in case
case of
chnical
of ffun-
damental analysis the information required is extensive. Hera
fundamental analyst requires macroeconomic data such ac
GDP
growth rate, intlation rate, interest rale etc., industry data suck
as
nature of industry, competition, groWth stage etc. as well as ce
com-
pany specific data such as sales, protitability, liquidity etc. Techni.
hnical
analysis, on the other hand, requires data related to securities only,
such as security prices, volume, benchmark index data and so on
(1) Tools and Techniques for analysis : Fundamental analysis is based
on the assessment of economy, industry and company level data
Hence a variety of accounting and statistical tools and techniques
such as ratio analysis, discounted cash flow analysis, regression
analysis, probability distribution method, sensitivity analysis (whatif
analysis), and econometric modeling is used in case of fundamental
analysis. Technical analysis on the other hand is based primarily on
trend analysis and chart patterns.
(vi) Investment decision (Buy-Sell signals) : In fundamental analysis an
investor is advised to buy a stock if its market price is lower than the
intrinsic value. If market price is higher than the intrinsic value then
the 'sell'advice is given. In technical analysis, buy and sell signals are
based on the analysis of various chart patterns and market as well as
stock indicators. If stock prices are expected to rise in near future, a
buy signal is advised. If stock prices are expected to decline in near
future a sell signal is given.
(vi) Where to Invest When to invest : Fundamental
vs.
analysis
thequestion Is this the right security to invest or Where toanswers
-

invest:
Hence using fundamental
analysis, one can identify the securities
which are worth
investing. Technical analysis is useful in timing ne
market i.e. When to buy or sell? Hence
analysis are not mutually exclusive. Theyfundamental and technic
are complementary anu a
 BASIC TENETS OF TECHNIC
AL. ANALYSIS Para 6.3
|223
iseinvestment decision requires
Wis
and ime of
right investment.
right L
[Link]
esboth- i.e. thc riolhe kind of securitics
(Vii) ime hori:
Time horizon: Fundamental analysis
determines intvinsic value of
a share and hence the investment decisions
based on lundamental
analysis is done lor a relatively longer period.
Technical analysis is
1scd to predict stock prices in near future. Hence
ic 11seful in short term investment technical analysis
making such as traders.
Emphasis: n case of fundamental analysis, the emphasis is on the
economic, industry and company fundamentals. It is not driven by
market forces or investor bchaviour. Hence the intrinsic value of
ashare will change only it there is a change in these fundamental
factors. Technical analysis, on the other hand, is based on market
movement of pricesdetermined by demand and
as

Hence investors' behaviour does affect technical

supply forces.
analysis. In recent
times it has been shown that in stock market, investors do not behave
rationally. Investors are irrational and are subject to a number of
behavioural biases such as- Overconlidence, regret avoidance, loss
aversion etc. Hence a new area of research in finance i.e. Behavioural
Finance has recently been developed.
tWho uses Fundamental analysis is used primarily by long term
investors whereas technical analysis is used primarily by speculators
or short term traders in the market.
As explained above there are many points of differences between funda-
mental analysis and technical analysis. These two approaches of security
yaluation arefundamentally different. But it does not mean that fundamental
and technical analysis are mutually exclusive. They are complementary as
a wise investment decision requires both - ie. the right kind of securities
and right time of investment. Fundamental analysis helps in identification
f the right type of securities ie. securities having higher real worth or
ntrinsic value than the market price. Technical analysis supplements fun-
damental analysis in terms of timing the market. It can be used wisely to
decide about the nght time to buy or sell.

6.3 BASIC TENETS (PROPOSITIONS) OF TECHNICAL ANALYSis

Technical analysis is based on certain tenets, premises or propositions.
Technicians do not consider value in the sense in which fundamentalists use
1t. The technicians believe that forces of demand and supply are reflected
in the patterns of price and volume trading. By
examinaion of these pat
terns they predict whether prices will move up or down. Thus technicians
 TECHNICALANALYSIS
Para 6.4 224
and emotional for
flucluations
reflect logical
belicve thal price analysis are

o r premises
of tecchnical
basic tenets
is
delerminecd by the demand and and supply
and

. The price of a security

Torces opcrating
in a market.
over long
term. 1 his long term
to move in trends nd
2. Prices tend
sets the direction of market prices.
emotional forces
rcfect logical and
3. Price fuctuations cause, o n c e
in lorce persist
movements,
whatever their for
4. Price be detected.
and can
some period of time to shift in demand. and
reverse due
may
5. The trends in security prices
supply be predicted well in
dvance
in demand and supply can
6. The changes technical tools.
with the help of charts and
of Technical analyst is to
Hence the real task
a

and
i Ildentify the trend
comes to an end and prices sta
one trend
ii. Recognize when
direction.
moving in the opposite
uses a number of
charts, patterns and technical
For this, technical analyst that charts are the
below. It must be noted
indicators which are discussed
basic tools for technical analysis.

ANALYSIS
6.4 TOOLS OF TECHNICAL
at the market level and at in-
Technical analysis can be performed both
dividual company level using various types of charts, ratios, patterns
or

and individual stock

indicators. Here we will examine market indicators
indicators separately.

6.4.1 Charts
Charts are the basic tools for performing technical analysis. It providesa
visual assistance to the technical analyst in detecting evolving and changing
patterns of price behaviour. Charts may be of various types such as Line
chart, Bar chart, Point and Figure Chart and Candlestick chart. It must be
noted that charts are useful both in the analysis of individual securities
as well as market movement analysis. On a particular day, the price oft a
share varies many times. It is difficult to plot all the prices prevailing for a
particular stock on a particular day. Therefore generally the following Iour
prices are of interest to an investor- Open, High, Low and Close.
 TOOLS OF TECHNICAL
225 ANALYSIs Para 6.4
nell Price:
Open Price::Open pice is the price at which the trading on a share starts
ona pariicular day.

sch price : High price is the

highest price at which the share has been
on a particular day.
raded
nrlce:
Low price: Low price is the lowest price at which the share has becn
particular day, traded
on a

price: Close piice is the price at which

Close
se
trading on a share closes on
aparticular day.
rhere are various types of charts which are used in technical analysis.
i Line chart
ii. Bar chart
ii. Bar chart of prices with volume
iv. Point and figure chart
. Candlestick chart
These charts are explained below:

i. Line Chart On line chart X axis shows the time or

a
number of
days/week. On Yaxis stock prices are shown. On a line chart only
closing prices of a stock are shown. They are connected with each
other successively with straight lines as shown in
prices on hve days are Rs. 14,15,14,17 and 12.
Fig 6.1. The stock

Line Chart
PCes

16
14
12
10

-Stock Price

2 3 4 5
Time

LINE CHART
FIG 6.1

Although line chart is convenient to draw, it does not reveal anything about
the intraday volatility of the stock price. It shows only the closing prices
and not other prices such as high price low
price or open price.
 TECHNICAL ANALYSIS

Para 6.4 226

ii. Bar Chart of a stock eve.
Bar chart' shows high, low and closing prices
A to the close price of the nday
equal
Open price of a day is generally
not shown
on a bar chart. But if if roevous
day. Hence it is gencrally
one can also show open price
equired
chart. oOn
of the share in a bar chart,
Y axis shows stock prices. The 1ar
chart X axis show time while
price minus t h
st price minus
of price i.e. the highest
of the bar shows the range
and hence if bar lengths increase o
lowest
price, in a particular day e
of increasing stock volatility.
it may be regarded as a signal
and opening prices may be dena
is placed every day and closing
In Fig 6.2 a bar chart is showned
with some signs such as or X.
-

the following table.

shown using
the stock price data given in

Day High Low Close

15 6 14

17 9 15
19 12 14
18 16 17
14 10 12
FIG 6.2 BAR CHART

20

18

14

12

10 High
Low
- Close

1 3 4 5
Time
iii. Point and Figure Chart
It is chart made up of X and O's. X is
a
for decrease in stock price. A
placed for increase and 0
buy signal is implied when X lines are
moving up after every O line. If O lines are going down after every
X line then a sell
signal is triggered. In this chart the axis do not
 TOOLS OF TECHNICAL ANALYSIs
227 Para 6.4
represent time or price level, rather they just show the directional
movement of prices irespective of the quantity of
change.
Eo. A stock's price over the 30
past days is recorded as Rs. 20, 25,
28, 26, 25, 35, 37, 40, 42, 38, 35, 37, 39, 41, 34, 28, 25, 37,
36, 39, 41, 45, 43, 42, 40, 38. 40, 38, 36, 34,

The point and igure chart will

appear as shown in Fig 6.3

FIG 6.3 POINT AND FIGURE

CHART
It must be noted that whenever
there is change price or O are
a in X
placed. The columns are changed when there is a change in direc-
tion i.e. from increasing
prices if the price starts declining then we
switched to second column and indicator 0. After that
the
increasing therefore we shifted to third column and put priceX
starts

every increase.
for signs
The main advantage of such a chart pattern is that it can compress
large volumes of data in a small group which can be used in
iv. Candlesticks Charts
analysis.
As the
suggests this chart type shows
name a candle for every day
price [Link] is a chart pattern which shows four prices -open,
close, high and low. If close
price lower than open price then the
is
box is filled with black colour otherwise left
empty. An
dark candlesticks are bearish indicators. On X axis we increasingly
measure time
and on Y axis we measure stock This
prices. chart pattern provides
a bird's
eye view as to the movement of stock prices both intraday -

and inter day.

 TECHNICAL ANALYSIS

Para 6.4 22
the lowing 55 dda
lollowing
are
shown lor
candlesticks

In Fig. 6.4, High Low Close

Day Open 14
6
16 20
9
15
12 17
12 14
16 19
3 17
23 16
20
10 12
14

25

20

15
Open
High
10
Low
Close

0
2 3 4 5
1 Time

FIG 6.4:CANDLESTICKS CHART PATTERN

v. Price and Volume Chart: Price-volume chart shows the high, low and
close price of a share along with its volume in the same chart. The
utility of this chart is that it provides intormation about the volume
of trading regarding that share besides showing the relevant prices,
Price and volume chart for the data given in the following table can
be depicted as shown in Fig 6.5.

Day Volume
(in 000) High Low Close
1 10000 20 6 14
2 11000 17 9 15
15000 19 12 14
4 14000 23 16 17
5 17000 14 10 12
 T0OLS OF TECHNICAL ANALYSIS Para 6.4
229

18000 25
16000

14000 20

ll
12000

10000 15 Volume

8000 High
10 Low
6000
4000 Close
5
2000

1 2 3 4

FIG 6.5 PRICE- VOLUME CHART

A.4.2 Technical Indicators and Technical Chart Patterns

Anumber of technical indicators and chart patterns are used by technical
analvsts. Some important indicators and chart patterns are discussed
blow
Market indicators: Market indicators are charts, or trends which
he general direction of the market. It covers the provide
indicators.
following theories or
1. Dow Theory Charles Dow, the grandfather of technical
propounded what is popularly known as Dow theory now. analysis,
Dow
theory is based on the assumption that stock market does not move
on random basis rather there are set trends
which can detect the
direction of market movement.
of market; whether bullish or
According to this theory in any type
bearish, three trends are simultaneously
at work the
primary trend, the intermediate trend and the minor
-

trend.
i. Primary trend is the long
term trend over a period
lasting
tor more than one year. This trend sets the overall
of the market. If
direction
primary trend is upward then bull market is
in operation whereas if
primary trend is downward then the
market is bearish.
ii. Intermediate trend, on the other hand lasts for a few months
and operate in the
opposite direction of
primary trend. If
the primary trend is upward then intermediate trend will be
Para 6.4
TECHNICAL ANALYSIS
230
Therefore interm
downward
movement and vice versa.

"secondary
corrections".
intermediate
trends are also known as
o r intra-day flttos.
Tertiary orminor trends
are day-to-day
for long. These
tua
long. Thesea rends
tii
market which
do not last for
tions in stock
providenomeaningful conclusion regarding the overall arket

least importance.
movement and hence are given
Bull Market : As per Dow theory a bull market is in operation wh
cces-
when
than the previous high and succo."
successive high points are higher
than the previous
low point. This c
can
also higher
are
sive low points 6.6.
understood with the help of Fig.
be the primary trene!
make out that
o n e can easily
As shown in Fig. 6.6
trend is the period of decin
line
The i n t e r m e d i a t e
is upward moving. it good time to
Therefore duringbull market, ofisdecline which
in this bull market. corrections i.e. the
periods
buy during secondary would be able to buv at
the investor
last for long. By doing
so
do not increase in stock prices
term he c a n expect
low prices and in
the long to day Huctuations in stock
market. Minor trends a r e day
due to bull a b o u t the investment.
are of n o u s e
in deciding
market index and

Primary Trend

Price
Secondary Trend

Time

FIG 6.6 BULL MARKET (DOWW THEORY)

Bear Market : As per Dow theory a bull market is in operation wn

Successive high points are lower than the
previous lows and su
low point. In
cessive low points are also lower than the previous
 TOOLS OF TECHNICAL ANALYSIS
Para 6.4
e understood with the help of Fig. 6.7. Here, primary trend is
ca
can

ald sloping. The intermediate trend is the period of increase

d o w n w a r d .

n this bear market. Here also it is termed as Secondary correction.

fore in a bear market, the right time to sell is
of intermediate corrections.
during the periods
Secondary
Price Trend

Primary Trend

Time
FIG 6.7: BEAR MARKET (DOW THEORY)
2. Elliott Wave theory
A related theory is Elliott wave theory, which is a variant of Dow
theory. As per Elliott wave theory stock prices can be described by
a set of wave patterns - long term, short term and minor waves.
Long term waves carry the entire market up or down while short
term wave move in the opposite direction. Minor waves are daily
fluctuations in the market and can be ignored by investors.
3. Moving Average Analysis
Moving average is a statistical technique to find out average of a
series on rolling basis. Moving average is an important indicator or
tool in technical analysis. Moving average can be used to analyse the
movement of the entire market as well as individual stock prices. 200
days or 53 weeks moving averages are most popular in the analysis
of overall market trend. The 200 days moving average is one of the
mostreliable and easily understandabletechnicalindicatorsavailable
to technical analysts and investors.
 232
TECHNICAL ANALY'SIS

first
Para 6.4 as
lollows -

of all the
divided by all
calculated

is a n d then.
divided
A 200 day
moving
for first
average

stock 200 days prices. Thi

200 s6
00

Is kept at the
prices
added
middle are
ie. 1O0.5"of
thesc
day.
200
Next we drop irst s t o c /erage
age
stock
cakcuiate
simple
average ck Pric
price
as to calculate
and calculate
from below
more
stock price
Thc averagc
is
then cenge
then
centere d
moving bau
one
a n d take
observations.

of these 200 average

on
nsis d
and
stock price Similarly
we
calculate

of these averages
h
of these averages by
101.5h dav. take average Ho"dki
at Next we centered.
ence lirst
again
put it in
the centre.

Such
averages
are

day, second
s
two
values at a time. written
against
101th
moving
will be
average
and so on.
moving day
against
102th number isodd
odd is easy, say 5
number casv

using
of first 53
average
average
Calcuiation of moving
this
the a v e r a g e
case
c entra
eeks
lS
In which is the
the central r nost
average.
27th day
wecks nmoving
c e n t e r e d against ter
a r e after this. Nevst
Next
stock prices
is and 26 days
are
b e t o r e this
f r o m the
series bow TL
26 days week
dav
day. TThis
as more
and add
one
center it at 28th day.
first week weckS
and
drop these 53 Bevond . this
calculate average of 53 weeks
observations.

have the last

we
until we of 53 data points.
goes on calculate average
to
point it is
not possible
with index
ine (or stock price linei
line is compared Two basic rules
le
Moving average market price line).
buy or sell signals (or
to identify
average line from
are line cuts the moving
market price
i When the
below it is a buy signal. average line from
line cuts the moving
market price Hence it is
i If the will s o o n set in.
that bearish trend
above, it implies This is shown in Fig
6.8
a s a 'Sell' signal.
regarded
Stock MA Line

price

Sell

Buy

Stock price
ine

Time

FIG 6.8 MOVING AVERAGE CHART

 T0OLSO' TECHNICAL. ANALYSIS Para 6.4
233
tralion 6.1:Following
lustration 6.1. are the daily closing index valucs of CNX NIFTY
h e pust 30 days. Calculate 7 Days moving average and 4 Days Movng
n d depict the novimg average line and index line on a line chart.
Day Index value Day Index value
7000 6 8150
7200 17 8O00
6900 18 7960
7100 19 7865
7400 20 7764
7500 21 7653
7700 22 7539
6900 23 7500
7300 24 7498
10 7600 25 7640
11 7700 26 7780
12 7800 27 7642
13 8000 28 7534
14 8120 29 7432
15 8200 30 7325
Solution: 7-Days and 4-Days moving averages are calculated below:
Day Index 7 Days 4 days Day Index 7

value MA MA
Days 4 Days
value MA MA
7000
|16 8150 8042.143 8097.5
2 7200
17 8000 8008.429 8035.625
6900 7100 18 7960 7941.714 7945.5
7100 7257.143 7187.5 19 7865 7847.286 7853.875
7400 7242.857 7325 20 7764 7754.429 7757.875
7500 7257.143 7400 21 7653 7682.714 7659.625
7700 7357.143 7362.5 22 7539 7637 7580.75
6900 7442.857 7362.5 23 7500 7624.857 7545.875
7300 7500 7375 24 7498 7607.429 7574.375
10 7600 7571.429 7487.5 25 7640 7590.429 7622.25
11 7700 7631.429 7687.5 26 7780 7575.143 7644.5
12 7800 7817.143 7840 27 7642 7550.143 7623
13 8000 7938.571 7967.5 28 7534 7540.125
4. Market Breadth Analysis
Market breadth is the spread between the number of
stocks that
advance and decline in price. For example if on a
300 stocks advance in prices while 200 stocks decline in
particular day
market breadth will be 300 200 100. One can calculate
=
prices, then
cumu-
lative breadth and if it is increasing, it signals a bullish market and
vice versa. In Table 6.1 cumulative breadth is
continuously rising
Para 6.5
TECHNICAL ANALYSIS
236
Bullish market in future
and hence it suggests the presence of as
per Market breadth analysis.
TABLE 6.1 MARKET BREADTH ANALYSIS

Day Advances Declines Market Breadth Cumulative Breadth

200 100 100
1 300
130 230
350 220
300 50 250 480
3
320 170 150 630
4
5 270 160 110 740
6.5 SPECIFIC STOCK INDICATORS
A number of indicators, chart patterns are
used to identity buy and sell
below:
signals on individual stocks. These are explained
 SPECIFIC STOCK INDICATORS
237 Para 6.5

(a) Support and Resistance Level

Support and resistance levels can be identificd both for the market
index as well as individual stocks. Support level is that price, below
which the price is not expected to fall. Resistance level is that price,
above which the price does not go. For example assume that the
price of SBI share starts to decline whenever it reaches Rs. 3000
and it starts to rise whenever it approaches Rs 2000. The SBI share
price have been moving in the range of Rs. 2000 to Rs. 3000 for
long. Then Rs 2000 may be considered as its Support level (or sup-
port price) and Rs. 3000 as its Resistance level(or resistance price).
Hence if a stock's price approaches its support level, it is a good buy
opportunity. If a stock's price reaches its resistance level, it provides
a good opportunity to sell. For example if the support and resistancee
price of SBI share is Rs. 2000 and Rs. 3000 respectively, then it is
expected that SBI share price will generally lie between Rs. 2000 and
Rs. 3000. If SBI share price reaches Rs. 2000, it is considered as a
good opportunity to buy. On the other hand if SBI share price reaches
Rs. 3000, it is considered to be a good opportunity to sell SBI share.
If stock price breaches its support level, it indicates a bearish trend
for the stock price. In that case, stock price is further expected to
decline. On the other hand is stock price breaches the Resistance
is ex-
level, it indicates a bullish phase for the stock and stock price
formation of Support and
pected to rise further. Fig 6.9 shows the
Resistance level.
Resistance Levels
important points about Support and
are
Two
Resistance levels indicate the Lower and Upper
i Support and
limit respectively, within which stock prices are expected to
constant overtime.
move. However these limits do not remain
may change. In a
bull market the support and resistance
They these levels
levels may be revised upwards. In a bear market
may be revised downward
that stock price
ii. Support and Resistance levels does not imply
breach
cannot m o v e beyond
these levels. Stock price may
levels. If the stock price goes beyond
support and resistance direction
m o v e in upward
resistance level, it suggests a strong
are predicted to be higher.
It
and hence the future stock prices
to buy. On the other hand if the
provides a good opportunity move

goes below support

level, it suggests a strong
stock price
 TECHNICAL ANALYSIS
Para 6.5 28
in downward
direction and hence
the future stock stock prices are
nr

be lower. It provides a good opportunity todre

to sell
predicted to

Price

Reslstance Level

Support
Level

Time

FIG 6.9 SUPPORT AND RESISTANCE LEVEL

(b) Relative Strength
In relative strength analysis we compare a pertormance
stock's overa

recent period to the market performance or

other stocks in the same
divided by market
industry. Relative strength ratio is the stock price
index. If the ratio increases overtime it shows relative strength of the
stock and hence profitable investment opportunity.

(c) Double Bottom and Double Top

Double bottom Chart Pattern looks like "W" shape while double top
looks like M 'shape'. Two bottoms show the support level for the stock
and hence provides a buy opportunity at the bottom. Two tops show
the resistance level and an opportunity to sell. Fig 6.10 shows Double
Top and Fig 6.10A shows Double Bottom chart patterns.
 SPECIFIC STOCK INDICATORS Para 6.5

2 3 9

Price

Resistance
Level

Time

FIG 6.10: DOUBLE TOP

Price

B1 B2 Support Level

Time

FIG 6.10A: DOUBLE BOTTOM

(d) Head and Shoulder

Head and shoulder chart pattern is the most popular among all chart
patterns. At the end of a long term trend (especially a bull run) we
may find head and shoulder configuration. This pattern has a high
top i.e. head and two small tops on its either side i.e. shoulders. One
can draw a neckline by joining the bottom of the shoulders. If stock
price goes below the neckline, it indicates bearish phase in near
 IECHNICAL ANALYSIS
Para 6.5
future and hence a sell signal to the short term investor :
24
shows Head and Shoulder chart pattern. 61
Price

Time

FIG 6.11: HEAD AND SHOULDER

(e) Inverted Head and Shoulder

Itisjust the reverse of head and shoulder configuration. Inverted head
&shoulder pattern is shown in Fig 6.12. Inverted head and shoulder
chart pattern has an inverted head and two inverted shoulders. TE
stock price rises above the neckline, it indicates bullish phase for the
stock in near future and hence provides a 'buy signal'.

Price

S2

Time
FIG 6.12: INVERTED HEAD AND SHOULDER
 SPECIFIC STOCK INIDiCATORS
Para 6.5
Triangles

Traingle patterns can also be

detccted in stock price charts
angle
ang paterns can De ot three types symmetrical, ascending
-
Tri
scending triangle. Symnetrical triangle suggests a
desc and
narket till it is range bound
market complete. When
ascending triangle breaks towards
above, Ssuggests
it bull run in near future and
hence a buy signal. If
descending triangle brcaks towards below, it implies price decline in
near future
near tuture and hence
suggests a 'sell signal. Triangles are shown in
Fig 6.13, 6.13A and 6.13B.
Price

Time

FIG. 6.13: SYMMETRICAL TRIANGLE

Price

Wwwe-
Www-
ww

Time
FIG. 6.13A: ASCENDING TRIANGLE
 T E C H N I C A L A N A L Y S I S

Para 6.6 24

Price

Wwww
Time

DESCENDING TRIANGLE
FIG. 6.13B:
243
SUMMARY

echniques and trend analysis. Technical

o f
tools,

analvsis o
analysis is based on the
off past price and volume data. However it
suffers from certain
Iimitations

i airement of Interpretationalskills: Variouscharts and

Reguirem.

technical analysIs requires careful patterns

interpretation by skilled ana
acts. Hence technical tools and indicators
may not be used widcly
by common investors.

Subiective analysis and Behaviouralbiases: Technical

biect to many behavioural biases while analysts, are
atterns and predicting future stock
interpreting various chart
prices based on the analysis of
nast price data. Some of thcse
P behavioural biases are- over-confi
dence, framing, regret avoidance and so on.
Late response to a chart pattern:Once a chart
be acted upon pattern is detected,
it needs to
immediately. Hence the technical analyst
must be a quick identifier ot a chart
pattern to make gains out of it.
Inpractice, such a quickness or promptness is rarely observed.
a Short term perspective: The perspective of a chartist is short term
and hence long term predictions are generally not based on
technical
tools and techniques. For long term analysis, fundamental analysis
is a better approach to find out the real worth of a share.

which is superior? -
Technical analysis
Fundamental analysis
or

There has always been a debate between fundamental analysts and

tech
nical analysts to show their supremacy. It must be noted that Fundamental
analysis and Technical analysis are notmutually exclusive. They are comple-
mentary. Technical analysis complements fundamental analysis to identifv
the right time to buy or sell the security which is suggested by fundamental
analysis. While fundamental analysis calculates the intrinsic value of a share
using EIC framework, technical analysis predicts future price movements
using past price and volume data. The perspective in case of Fundamental
analysis is long term while in case of Technical analysis, short term. Hence
Fundamental analysis is considered superior to Technical analysis when
an investor has a long term investment horizon. Technical analysis on the
other hand is preferred by short term traders and speculators.