Foundations 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
 Foundations of Technical
Analysis
Three premises on which Technical Analysis
builds up

• Market action discounts everything

• Prices move in trends

• History repeats itself

 Foundations of Technical
Analysis
Definition of Technical Analysis

“ Technical Analysis is the organized and systematic

study of a pictorial representation (chart) of the past
price actions of a particular item with a view to
ascertaining its expected future behavior”.
 Foundations of Technical
Analysis
DO CHARTS TELL ANYTHING / EVERYTHING
 Foundations of Technical
Analysis
Basic tenets of the Dow Theory

1) Averages discount everything

2) Market has three (3) trends
3) Markets go through three (3) phases
4) Averages must confirm each other
5) Volume must confirm the trend
6) A trend is in effect until it gives definite signals of
reversal
 Foundations of Technical
Analysis
Technical Analysis addresses the simple question

“WHEN TO DO WHAT ?
Foundations of Technical
Analysis
“ Investors must keep in mind that there
is a difference between a good company
and a good stock”
 Foundations of Technical
Analysis
Types of charts
1) Bar chart

2) Line or Close chart

3) Japanese Candlestick chart

 Foundations of Technical
Analysis
EXAMPLE OF A BAR CHART
 Foundations of Technical
Analysis
Charting techniques
•Arithmetic scale

•Log scale
Price Patterns
• Price movement of listed securities take shape of
recognizable patterns over a period of time.

• These patterns have independent

interpretations towards the direction and
absolute movement of the price.

•Patterns reflect accumulation or distribution

and thus reflect reversal or continuation of price
trends.
Price Patterns : Head &
Shoulder
• Mostly occurs as a reversal pattern.

• Volumes dry up during the formation of a H &

S top / bottom.

• Volumes increase as we reach a breakout / may

not increase for a breakdown.
Price Patterns : Head &
Shoulder - examples
GMR – Daily chart
Price Patterns : Head &
Shoulder - examples
IDFC – Daily chart
Price Patterns : Head &
Shoulder - examples
Indusind – weekly chart
Price Patterns : Head &
Shoulder - examples
Kotak Bank – daily chart
Price Patterns :Cup /
Rounding Formation
• Mostly occurs as a long term reversal pattern.

• Volumes dry up during the rounding formation but

breakout happen with unprecedented surge in volumes

• Occur over a long period and to be seen on arithmetic

scale.

• Reflect long term change in fundamental / strong

operator activity.
Price Patterns :Cup /
Rounding Formation – Ex.
SAIL – Monthly chart
Price Patterns :Cup /
Rounding Formation – Ex.
Taneja Aero – Monthly chart
Price Patterns :Cup /
Rounding Formation – Ex.
Grasim – Daily chart
Price Patterns :Cup /
Rounding Formation – Ex.
Bajaj – Weekly chart
Price Patterns :Triangles
• Mostly occurs as continuation pattern. May occur
as reversal patterns too.

• Price movement within two contracting lines

sloping in different directions.

• Symmetrical / upward sloping / downward sloping

etc.

• Time and Volume test.

Price Patterns : Triangles
Hind Oil – Daily chart
Price Patterns : Triangles
Fin Tech – Daily chart
Price Patterns : Triangles
Brigade Ent – Daily chart
Price Patterns :Flags/Pennants
/Rectangles
• Cousins of Triangles

• Mostly occurs as continuation pattern. May

occur as reversal patterns too.

• Represent a phase in trended movement which

is equivalent to a small interval.
Price Patterns :Flags/Pennants
/Rectangles – Ex.
ABB Ltd – Daily chart – Rect.
Price Patterns :Flags/Pennants
/Rectangles – Ex.
ACC Ltd – Daily chart – Flag Inv
Price Patterns :Flags/Pennants
/Rectangles – Ex.
IDBI Ltd – Daily chart – Pennant
Price Patterns :Double
Tops & Bottoms
• Mostly occurs as reversal pattern.

• Price movement records two highs at a same

level in case of double top and two lows at same
level in case of double bottom.

• Volume confirmation is important.

Price Patterns :Double tops &
bottoms – Ex.
Colgate – Daily chart – Dou. top
Price Patterns :Double tops &
bottoms – Ex.
Colgate – Daily chart – Dou. top
Price Patterns :Double tops &
bottoms – Ex.
R Com – Daily chart – Dou. bottom
Price Patterns :Triple Tops
& Bottoms
• Mostly occurs as reversal pattern.

• Price movement records three highs at a same

level in case of triple top and three lows at same
level in case of triple bottom.

• Volume confirmation is important.

Price Patterns :Triple tops &
bottoms – Ex.
BEML – Daily chart – Triple top
Price Patterns :Triple tops &
bottoms – Ex.
HTMT – Daily chart – Triple bottom
Price Patterns :Wedges
• Mostly occurs as reversal pattern. May occur
as continuation patterns too.

• Price movement within two contracting lines

sloping in same directions.

• upward sloping / downward sloping wedges.

• Volume confirmation is important.

Price Patterns : Upward
Sloping Wedge - examples
IDFC – Daily chart
Price Patterns : Upward
Sloping Wedge - examples
Rel Cap – Daily chart
 Foundations of Technical
Analysis
Uptrend:

Higher tops and higher bottoms represent an uptrend

Down trend:

Falling tops and falling bottoms represent a downtrend

 Foundations of Technical
Analysis
Trend-lines: lines on the chart which
represent a particular trend and also signal
reversals in such trends.

A trend line is formed by joining a series of tops (if the

trend is down) or bottoms (if the trend is up) and
suggests that the ongoing trend is in force as long as
the line is not violated.
 Foundations of Technical
Analysis
Example of Trend Lines
 Foundations of Technical
Analysis - Trendlines
3 important parameters to judge a trendline:

• The length or time of existence of a trendline.

•No of touch points .

•Slope of the trendline.

 Foundations of Technical
Analysis
Example of Trend Lines
 Foundations of Technical
Analysis
Example of Trend Lines
 Foundations of Technical
Analysis
Example of Trend Lines
 MOVING AVERAGES
A moving average is an indicator that show’s the average
value of a security’s price over a period of time. In technical
analysis it is calculated on a dynamic (day to day basis) and
the average value changes with change in the price of
security.
 MOVING AVERAGES
• The Simple Moving Average

• The Weighted Moving Average

• The Exponential Moving Average

• Smoothen the underlying data

• Represent the trend for which average is calculated

• Provide Support Resistance level

 MOVING AVERAGES
Using moving averages
• Identifying trend reversal by price and moving average crossover
• Identifying trends by crossover of two moving averages.

•Short period MA - Early entry or exit from the trend BUT more
whipsaws and higher incidence of false & loss making trades. More
transaction costs.

•Long period MA - Late entry and exit from the trend but lesser
whipsaws and lower transaction costs.
 MOVING AVERAGES
Example of a moving average (200 DMA : NIIT)
 MOVING AVERAGES
•Crossover of the MAs is used to enter or exit positions

•Late entry and exit but very few whipsaws

•Good for long term trading and positioning

•More stable, more peace of mind.

 MOVING AVERAGES
Cross over Signals
 MOVING AVERAGES
MOVING AVERAGE EXAMPLE
 MOVING AVERAGES
MOVING AVERAGE EXAMPLE
 MOVING AVERAGES
MOVING AVERAGE EXAMPLE
Foundations of Technical
Analysis

MOMENTUM & DIVERGENCE

 Foundations of Technical
Analysis
Divergences
 Foundations of Technical
Analysis
Divergences : -VE divergence Aptech Ltd
 Foundations of Technical
Analysis
Divergences : Nifty Daily chart
 Foundations of Technical
Analysis
Concept of SUPPORT: Level at which
demand is expected to be stronger then
supply.

Concept of RESISTANCE: Level at

which supply is expected to be stronger
then demand.
 Foundations of Technical
Analysis
Functions of SUPPORT:
• Level around which one can initiate long positions
• Used for putting stop loss orders.
• Levels around one which can look to square short side
trades
• Violation of important support levels indicate possibility
of further decline in the stock price.
 Foundations of Technical
Analysis
Functions of RESISTANCE:
• Level around which one can initiate short positions
• Used for putting stop loss orders.
• Levels around one which can look to square long side
trades
• Violation of important resistance levels indicate
possibility of further advance in the stock price.
 Foundations of Technical
Analysis
How to arrive at Supports & Resistances:

• Trendlines
• Levels on price patterns
• Moving averages
• Gaps
• Consolidations
• Historical tops and bottoms
• Fibonacci Retracement levels
Foundations of Technical
Analysis

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