Technical analysis

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DEFINITION:
Technical Analysis is the study of:
 PRICE.
 VOLUME.
 OPEN INTEREST.
It is the study of market action through the
help of charts and other technical indicators
so as to forecast the trend.

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ASSUMPTIONS:
Current Price of an underlying asset discounts all
information.
Price always moves in trends.
History repeats often.

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DIFFERENCES:FUNDAMENTAL ANALYSIS TECHNICAL ANALYSIS
1. TIME CONSUMING. 1. QUICK STUDY.
2. STUDY OF CAUSE. 2. STUDY OF EFFECT.
3. INTRINSIC VALUE. 3. STUDY OF CHARTS.
4. INCLUDES ECONOMIC,
INDUSTRY AND COMPANY
ANALYSIS.
5. APPLIED FOR FEW
MARKETS UNDER STUDY.
4. PRICE, VOLUME AND OPEN
INTEREST ANALYSIS.
5. CAN BE APPLIED TO ANY
MARKET AND INSTRUMENT.

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DIFFERENCES IN APPLICABILITY:Technical analysis as applied to stock
Markets is same to even derivative markets.
However the following things shall be kept
In mind:
Pricing Structure.
Time period.
Margin requirements.
Timing is everything in futures market,
where buy and hold strategy does not work.

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DOW THEORY:
 Ideas of Charles Dow, propounded by NELSON
and William P Hamilton.
 Assumptions of Dow theory:
a) The Market indices (Averages) discounts
everything.
b) Individual securities generally move along with
the market trend.
c) The market has 3 trends, namely:
1. Primary Trend. (Major trend).
2. Secondary Trend. (Intermediate trend).
3. Minor Trend. (Short term trend).

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STUDY OF VARIOUS TRENDS:
1. THE PRIMARY OR MAJOR TREND:
Dow compares the major trend to a TIDE, where
a major uptrend is represented by patterns of
rising peaks and troughs and a downtrend is
characterized by lower peaks and troughs.
A MAJOR TREND LASTS FOR MORE THAN AN
YEAR OR SEVERAL YEARS.

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PRIMARY TREND:
A Bull market is represented by an Uptrend in the
Primary trend and a Bear market is represented by
a Downtrend in the Primary Market.
They represent extreme and extensive
movements on either side with atleast a 20%
change in the price.
A long term investor is concerned only with
primary trend reversal and will try to catch the
bull or bear market early.

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2. THE SECONDARY OR INTERMEDIATE TREND:
DOW compares the intermediate trend to
waves that makeup tides and they represents
correction in the Primary trend.
AN INTERMEDIATE TREND GENERALLY
LASTS FOR THREE WEEKS TO THREE
MONTHS. THESE INTERMEDIARY
CORRECTIONS GENERALLY RETRACES 1/3 OR
1/2 OR 2/3 OF THE PREVIOUS MOVE.

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3. THE MINOR OR SHORT TERM TREND:
DOW compares the minor or short term
trend to ripples on the waves. Minor
trend represents fluctuations in the
intermediate trends.
A MINOR TREND GENERALLY LASTS FOR LESS
THAN THREE WEEKS.

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FOCUS ON MAJOR TRENDS:
Dow suggests to focus on the big picture
i.e. to focus on the MAJOR TREND.
The major trend consists of three phases
Namely:
a) ACCUMULATION PHASE.
b) PUBLIC PARTICIPATION PHASE.
c) DISTRIBUTION PHASE.

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Primary Trend:
Accumulation stage is generally caught only by
farsighted investors, technical traders catch the Public
participation phase and markets have said to have
reached the distribution phase when markets boil
with financial good news making the front page. It is
also indicated by high speculation stage with cats and
dog shares moving with high volumes and price
without fundamental backing.

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VOLUME MUST CONFIRM THE TREND!!!
According to DOW, Volume must confirm
Uptrend by expanding as Price moves
Higher and diminishes with decrease in
Price.
In a Downtrend, Volume should expand as
Price drops and diminish as they rally.

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A trend is said to be at effect until it gives definite
signals that it has reversed:
A trend in motion continues to be in motion until
any external force causes it to change direction.
Various technical tools help the analyst to identify
signals of trend reversals.
A trend before reversing, slows down and then
changes direction.
Volume confirmation of a trends direction reversal is
to be considered.

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CRITICISMS OF DOW THEORY:
 Dow theory generally misses 20% to 25% of a move before
generating a signal.
 Use of closing prices (Line charts).
 Signals in Dow theory are generally generated during the
second phase of the uptrend.
 It was primarily used as an indicator of Economy which was
substituted to stocks and other underlying assets.
 Subjectivity and difficulty in distinguishing the various
phases of trends.
An investor is more concerned on his investments, rather
than just depending upon the movements in market returns.
It may not help a trader following intermediate trend.

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CHART CONSTRUCTION:
 Price and Volume data are generally studied by
using graphical representations called charts.
 Different types of charts include;
a) LINE CHARTS.
b) BAR CHARTS.
c) CANDLE STICKS.

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OPEN INTEREST:
 Open Interest is the total number of outstanding
future contract that are held by the market
participants at the end of the day.
 Open interest is the number of outstanding
contracts held by the longs or the shorts and not the
total of the both.
 Generally Volume and Open interests will be small
at the early stages of futures contract life and
expands as it reaches the maturity period and again
drop during close to expiration stage.
 For trading purpose, avoid stocks with lower
volumes and lower open interest.

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TREND ANALYSIS:
“ALWAYS TRADE IN THE DIRECTION OF
THE TREND”
“TREND IS YOUR FRIEND”
“NEVER BUCK THE TREND”
It is the direction of the PEAKS and TROUGHS
that constitutes market trend.
A Trend is simply the indicator of the direction
of the market.

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TYPES OF TREND:
 AN UPTREND.
Series of successive higher peaks and
troughs.
 A DOWN TREND.
Series of declining peaks and troughs.
 SIDEWAYS TREND.
Series of Horizontal peaks and troughs.

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TREND STRATEGY:
 In an Uptrend, go LONG (BULLISH).
 In a Downtrend, go SHORT (BEARISH).
 In a Sideways trend, DO NOTHING.
 Trend is classified into 3 categories
based on their time period:
a) Major Trend.
b) Intermediate Trend.
c) Minor Trend.

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SUPPORT AND RESISTANCE:
SUPPORT:
It is an area or level on the chart where buying
interest is sufficiently strong to overcome selling
pressure i.e. Demand > Supply. In short, the
troughs or reaction lows are called as Support.
For an Uptrend to continue, each successive lows,
(Supports) must be greater than the preceding
low.

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RESISTANCE:
It is an area or level on the chart where Selling
pressure is sufficiently strong enough to
overcome buying interest i.e. Supply > Demand.
In short, the peaks or reaction highs are called as
Resistance.
For an Uptrend to continue, each successive
highs, (Resistances) must be greater than the
preceding highs.

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CAUTION:
If the corrective dip in an uptrend
comes all the way to previous low or
breaches it, it is an early signal of
reversal of a trend (downward move)
or beginning of sideway movement.

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BETTER CONFIRMATION:
 More the trading that takes place in the
Support or Resistance area, more significant it
becomes.
 Amount of time spent in the support or
resistance area is a sign of better confirmation.
 Volume also acts as a pivotal point in
determination of better future prices and
confirms better the support or resistance levels.

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 Support becomes resistance and vice versa if a
Support level is penetrated (Broken out) with a
significant margin and similarly in case of a
break out of resistance levels.
 In an uptrend, previous resistance levels which
have been broken by a significant margin become
supports.
 In a downtrend, violated support levels
becomes resistance levels on subsequent
bounces.

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TREND LINES:
 It is a simple but very valuable technical tool.
 Uptrend:
It is a straight line drawn from left to right
along with every successive lows.
 Downtrend:
It is a straight line drawn from left to right.
along with every successive highs.
 AN UPTREND OR A DOWNTREND SHALL BE
CONFIRMED BY JOINING OF ATLEAST
3POINTS.
 Days low or highs shall be considered for drawing a trend line.

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TREND LINES:
 Trendline shall include all price action.
 Trendline break on a closing basis is considered
more valid than on intraday basis.
 Valid trend line break is generally considered with
a limit of 3% to 5% from the neckline.
 Deciding the levels of tolerance is left to the risk
levels of the investor.
 A minimum 2day close below or above the trend
line break is also generally considered.
 Few of them even consider a weekly break of trend
line as a valid signal.

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FAN PRINCIPLE:
 Sometimes after the violation of an uptrend line,
prices will decline a bit before rallying back to the
bottom of the old uptrend line, which is now acting
as the resistance.
 The breaking of the 3rd
trend line in an UPTREND
signals the reversal of the trend. Generally the
broken trend line 1 and 2 becomes the Resistance
levels.
 The breaking of the 3rd trend line in a
DOWNTREND signals the reversal of the trend.
Generally the broken trend line 1 and 2 becomes the
Support levels.

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CHANNEL LINES:
 Channel line also called as Return line is an area
between two parallel lines i.e. the basic trendline and
the channel line drawn parallel to the basic trendline.
 Generally on an Upward trendline, supports form the
basic trendline and the resistance the upper channel.
 Confirmation of an existence of channel is proved by
the price action within the two parallel lines.
 Failure to reach the channel line in an upward trend
is an early signal of beginning of weakness.

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CHANNEL LINES:
 Once a breakout occurs from an existing price
channel, prices usually travel a distance equal to the
width of the channel from the point at which trend line
is broken.
 Out of the 2 trendlines constituting a channel, the
basic trendline is by far the most important and
reliable one.
 The Channel line is a secondary use of the trendline
technique.
 The failure to reach the upper end of the channel
line is an early warning that the lower line (Basic trend
line) may be broken in the near future.

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PERCENTAGE RETRACEMENT LINES:
 After a particular move, Prices generally retrace
a portion of the previous move, before resuming
the trend in the original direction.
 These counter trend moves are called as
retracements and are generally to the extent of
50% of the previous move.
 Besides 50% retracements, there are minimum
(1/3) and maximum (2/3) retracements too.
 Percentage retracements are applicable to all
types of trends.

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PERCENTAGE RETRACEMENT LINES:
 If the prior trend is to be maintained,
66.67% or 2/3 retracement is a critical point
not to be breached.
 66.67% retracement is low risk area to buy
in an uptrend or to sell on a downtrend.
 If prices move beyond the 66.67%
retracement, then the odds favour a trend
reversal rather than just a retracement. The
move in such situations usually retrace 100%
of the previous trend.

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SIGNIFICANT REVERSAL DAYS:
REVERSAL DAYS ARE MORE KEENLY WATCHED ON
WEEKLY AS WELL AS MONTHLY CHARTS.
CHARTISTS GIVE MORE SIGNIFICANCE TO WEEKLY
CHART REVERSAL THAN DAILY CHART REVERSAL AND
MORE SIGNIFICANCE TO MONTHLY THAN WEEKLY.
 VOLUME CONFIRMATION ON A REVERSAL DAY IS ALSO
SEEN FOR BETTER PREDICTIONS.

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GAPS:
 It is the area on the bar chart where no trading has taken
place.
 UPSIDE GAPS are gaps opened due to Open price being
greater than the previous days high and that upside gap
opened are not filled in during the day.
 DOWN SIDE GAPS are gaps opened due to days high
price being below the previous days low.
 Upside gaps are signs of Market strength whereas
Downside gaps are signs of market weakness.
 Gaps on weekly and monthly charts are considered more
significant to that of gaps on a daily chart.

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TYPES OF GAPS:
BREAK AWAY GAPS.BREAK AWAY GAPS.
RUNAWAY GAPS.RUNAWAY GAPS.
EXHAUSTION GAPS.EXHAUSTION GAPS.

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BREAKAWAY GAPS:
 It usually occurs at the end of an important price
pattern and signifies beginning of an important
market move.
 The breaking of an important RESISTANCE or
SUPPORT through a breakaway gap is a solid
confirmation of a beginning of a major and steep up
move or a downward move.
 Break away gaps usually occur with heavy volumes.
 Break away gaps are generally not filled.
 Break away gaps on the upside acts as an support
and on a downtrend acts as resistance.

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RUNAWAY GAPS:
 It is also called as Measuring gaps which usually
occurs at the midway of a major move.
 It is a signal of markets moving effortlessly with
comfortable volumes.
 It signifies the continuation of the major move
which started with the Breakaway gap.
 It is also used to set up price targets.
 Run away gaps are also not filled.
 Run away gaps on the upside acts as an support and
on a downtrend acts as resistance.

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EXHAUSTION GAPS:
 It usually occurs at the END of a major move.
 An analyst should expect runaway gaps after break
away and Exhaustion gap after Run away gaps.
 It signifies the END of the major move which started
with the Breakaway gap and continued with a Run
away gap.
 It is used to exit positions on the either side.
 Exhaustion gaps are generally filled.
 Exhaustion gaps on the upside or downside acts as
the neckline and breach of the same is a strong signal
of reversal.

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ISLAND REVERSAL:
 It occurs after an exhaustion gap, generally with a
time period of 2 days or weeks.
 An Exhaustion gap to the upside followed by a
breakaway gap to the downside completes the ISLAND
REVERSAL PATTERN and indicates reversal of trend.

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CHART PATTERNS:
 It is a formation that appears on a price chart that
can be classified into different categories which have
future predictive value.
 Chart Patterns can be classified into 2 broad
categories, namely:
a) Reversal Patterns.
b) Continuation Patterns.
 Volume plays a very important role in confirming
the above pattern formations and future predictions.

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REVERSAL PATTERNS:
HEAD AND SHOULDER:
 There shall exist a prior Uptrend before the
formation of an Head and Shoulder pattern.
 The peak of the head shall be higher than the peaks
of the either shoulders.
 Generally peaks are with heavy volumes and troughs
with lighter volumes.
 Generally rally into the newer highs is on lighter
volumes in comparison with the previous highs rally.
 Breach of neckline which forms the support line is
important.

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REVERSAL PATTERNS:
 Breach of neckline is considered on the closing basis and
not on intraday basis.
 Volume should increase on the breaking of the neckline.
 3% to 5% breach below the neckline is also considered for
better confirmation.
 Usually a Return move develops which is a bounce back to
the bottom of the neckline (support) breached, now acting
as a stiff Resistance.
 If the initial breaking of the neckline is on heavy volumes,
the probability of bounce back or the return move is less
and vice versa.
 After the breach of neckline, prices should not re-cross
the neckline again, if crossed it is a failure pattern.

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HEAD AND SHOULDER:
MEASURING IMPLICATIONS:
 Price Objective is based on the Height of the Pattern.
 The distance from the top of the head to the neckline
(Vertical line) is the expected price downtrend from the
point of breach of the neckline.
 The above Price objective is a minimum target and the
maximum price target might be the retracement of the
full previous move. (100% RETRACEMENT OF PREVIOUS
MOVE)
 ½ and 2/3 retracements of previous move can also be
considered for the price targets to adjust.
 Gaps, Previous trends break, Previous supports and
resistances shall also be considered while fixing the
price target.

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INVERSE HEAD AND SHOULDER:
 It is a mirror image of the Head and
Shoulder top Pattern.
 The volume from the head should see
heavier volumes and a burst of volumes in
breaking of the neckline.
 Return move back to the neckline
acting as support line is seen more often
in a inverse pattern rather on top pattern.

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INVERSE HEAD AND SHOULDER:
MEASURING IMPLICATIONS:
 Price Objective is based on the Height of the Pattern.
 The distance from the top of the inverted head to the
neckline (Vertical line) is the expected price upside from
the point of breach of the neckline.
 The above Price objective is a minimum target and the
maximum price target might be the retracement of the
full previous move. (100% RETRACEMENT OF PREVIOUS
MOVE)
 ½ and 2/3 retracements of previous move can also be
considered for the price targets to adjust.
 Gaps, Previous trends break, Previous supports and
resistances shall also be considered while fixing the
price target.

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COMPLEX HEAD AND SHOULDER PATTERNS:
 It is a variation of Head and Shoulder Pattern which are
rarely found.
 These are patterns where 2heads may appear along with
a right and a left shoulder.
 It can also be a double left and a double right shoulder.
 They have the same forecasting implications to that of
Normal Head and shoulder pattern.
 A lot of anticipatory buying takes place during the
formation of the right shoulder and aggressive traders take
positions before the confirmation of the pattern itself.
 If the initial positions prove right, additional positions
can be added at the breach of neckline.

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CAUTION:
 HEAD AND SHOULDER PATTERN CANHEAD AND SHOULDER PATTERN CAN
ALSO ACT AS A CONSOLIDATIONALSO ACT AS A CONSOLIDATION
PATTERN, RATHER THAN REVERSALPATTERN, RATHER THAN REVERSAL
PATTERN.PATTERN.

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TRIPLE TOPS AND BOTTOMS:
 It is a slight variation of Head and Shoulder pattern
which is very rare as a chart pattern.
 The three Peaks or Troughs in the Triple Top or a Triple
bottom formation is at the same level.
 Volumes tend to decline with each successive peaks and
increase at the breakout point.
 The measuring technique and the return move is same as
that of the Head and Shoulder Pattern.
 A Triple bottom is a mirror image of triple top.
 Study of previous trend before the formation of a triple
top or a triple bottom is crucial.

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DOUBLE TOPS AND BOTTOMS:
 It is a common reversal chart pattern found very
frequently.
 This pattern must have two peaks at about the same
level.
 Volumes is generally low on the second peak and picks
up on the break of the neckline.
 The measuring technique and the return move is same as
that of the Head and Shoulder Pattern.
 A Double bottom is a mirror image of double top.
 Study of previous trend before the formation of a double
top or a double bottom is crucial.

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DOUBLE TOPS AND BOTTOMS:
 A double top is commonly referred to as “M” formation
and a double bottom as “W” formation.
 A normal pull back from a previous peak before the
resumption of the uptrend should not be studied as
Double top formation. (Till the breach of neckline, the
double top formation is not complete)
 The longer the time period between the peaks or
bottoms and greater the height, more reliable is the chart
pattern.
 Generally Valid Double tops and bottoms should at least
have a months gap between the two peaks or troughs.

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VARIATIONS FROM THE IDEAL PATTERNS:
 Use of filters by traders to deal with variations in chart
patterns.
 On occasions the second peak will not reach the levels of
first peak.
 Most chartists want a close beyond the previous
resistance on a closing basis and not on intra day basis.
 Percentage penetration criteria of 3% to 5% is also
considered.
 The two day penetration rule is also used as a time filter.
 A Friday close beyond the previous peak is also
considered.

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SAUCERS AND SPIKES:
 It is also called as rounding bottoms.
 It is a very slow and gradual turn from down to side ways
and then to an uptrend.
 Longer they last, more significant they are.
 Spikes are “V” patterns that happens very quickly with
little or no transition period.
 They usually occur in markets which so over extended,
that a sudden piece of adverse news will turn the trend
abruptly without giving signals of slowing down or a turn
in trend.
 Volumes is the only tool that can help in predicting a
“Spike”.

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CONTINUATION PATTERNS:
 It is an indication of a sideways price action, which is a
pause in the prevailing trend and the next move will be in
the same direction of the trend which preceded the
formation.
 Continuation patterns are generally of a shorter duration
in comparison to that of reversal patterns.

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TRIANGLES:
 Triangle patterns are generally considered as
Continuation patterns even though sometimes they act
as Reversal Patterns.
 There are 3 types of triangles, namely:
a) SYMMETRICAL TRIANGLES.
b)ASCENDING TRIANGLES.
c) DESCENDING TRIANGLES.

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SYMMETRICAL TRIANGLES:
 Symmetric Triangles are also called as “COILS”
 These triangles show 2 Converging trend lines, the Upper line
descending and the Lower line ascending.
 The Vertical line measuring the height of the pattern is referred to
as “BASE”. (AB)
 The point of intersection of the above 2 trend lines is called as the
“APEX”. (C)
 A close outside either of the trend lines, completes the pattern.
B
A
C

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ASCENDING TRIANGLES:
 It is similar to that of a Symmetric Triangle with a rising lower line
except for the flat or horizontal Upper line.
as “BASE”.
“APEX”.
 This is generally a “Bullish Pattern”.
B
A
C

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DESCENDING TRIANGLES:
 It is similar to that of a Symmetric Triangle with a declining Upper
line except for the flat or horizontal Down line.
as “BASE”.
“APEX”.
 This is generally a “Bearish Pattern”.
B
A
C

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TRIANGLES:
 A Symmetric triangle pattern is a continuation pattern
which represents pause in the existing trend after which
the previous trend continues.
 The study of previous trend before the formation of a
triangle is highly significant for accurate interpretation.
 If the previous trend were to be an uptrend, the
implications of symmetric triangle is bullish and if it
were to be a down trend, it would have bearish
implications.
 A triangle should have minimum 4 reversal points i.e.
each trend line must be touched at least twice. Few of
them also have 6 reversal points.

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MEASUREMENT OF TRIANGLES:
 As a general rule prices should break out in the direction
of the Prior Trend somewhere between 2/3 to 3/4 of the
Horizontal width of the triangle.
 Horizontal width is the distance between the BASE at the
left of the pattern to the APEX at the right of the pattern.
 If prices remain within the triangle beyond the 3/4 point,
then the triangle loses its significance and prices may
reach to the APEX point.
 Trend reversal is given by closing penetration of one of
the trendlines.
 Return move is rarely found in Triangles, and the broken
line acts as Support in an up trend and resistance in a
down trend.

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TRIANGLES:
 Volume should diminish as the price swings narrow
within the triangle.
 Volume should pick up noticeably at the penetration
point.
 Measurement of symmetrical triangles are based on the
Height of the BASE or by drawing a parallel line upward
from the top of the BASE, parallel to the lower line.
B
A
C
D

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VOLUME PATTERNS ON TRIANGLES:
In an Ascending Triangle pattern, volumes
tend to increase on bounces and contracts
on dips.
In a Descending Triangle, Volumes should
be heavier on the downside and lighter
during the bounces.
A Triangle is considered to be an
intermediate continuation pattern which
generally take a month to 3months for its
formation.

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BROADENING PATTERNS:
 It is an inverted triangle or triangle turned backwards.
 A Broadening pattern should not show a converging
trend line Pattern.
 Volume tend to behave the opposite way as to a triangle
wherein it tends to expand along with the wider price
swings.
 It usually occurs at market tops which shows three
successive higher peaks and two declining troughs.
 The violation of the second trough completes the
formation of the Broadening pattern.
 An Expanding pattern is generally a bearish signal as it
appears at the market top.

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B
A
C
D
F
E
BROADENING PATTERNS:

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FLAGS AND PENNANTS PATTERNS:
 They represent brief pauses in Dynamic market
moves.
 It is preceded by a sharp or straight line move
before its formation.
 A Flag usually occurs after a sharp move and
represent pause in the trend. The flag should
slope against the trend.
 Volume should dry up on the formation and
burst on the breakout.
 A Flag generally occurs near the midpoint of a
move.

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 Both patterns are relatively short term and
should be completed within 1 to 3 weeks.
 It can also form on a down trend (Inverted flag
and pennant) signifying continuation of the
previous trend.
 Both patterns occur about the midpoint of the
previous up move or down move signifying half
the previous way remaining from the breakout.
 Both patterns take less time to form in a down
trend.

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A Pennant represents the formation of a
small symmetric triangle preceded by a
sharp up move.
Volume should be light on the formation
and burst on the breakout.
A Pennant is identified by 2 Converging
trend lines.

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On Balance Volume (OBV):
If Prices are on the downtrend with a flat
or raising OBV, it is a signal of bullishness
and if Prices are on the upside with a flat
or falling OBV, is a signal of bearishness.
A big spike in the OBV line indicates some
big news, and unless it is sustained by
further accumulation on the higher levels,
it should be studied as “Doubtful move”.
OBV can be considered as an indicator of
insider information.

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1. OBV.
2. MFI.
3. MOVING AVERAGE.
4. BOLLINGER BANDS.
5. 4 WEEK RULE.
6. OSCILLATORS.
7. CCI
8. RSI
9. STOCASTICS
10. MACD
11. ACCUMULATION – DISTRIBUTION
12. ATR.
13. WILLIAMS % R.
14. WILLIAMS A/D
15. CHAIKIN OSCILLATORS

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MOVING AVERAGES:
It is a simple trend analysis technique
which averages out the prices for a
particular period of time.
In short it is a Curving Trend line which
helps in identifying the beginning of a
new trend line or end of a old trend line.
It is only an indicator tool and not a
leading tool. It only reacts and never
anticipates.

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MOVING AVERAGES:
Moving averages lag the market price
action and smoothens the noise in price
action.
Shorter term Moving Averages are more
sensitive to price action in comparison to
longer duration moving averages.
Moving averages can be Simple or
Weighted or Exponential Moving
averages.

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Oscillators:
 Crossing of Zero line is considered as a trading signal
where crossing above the zero line is a buy signal and
below the zero line is a sell signal.
 Oscillators signals should not be used against the
basic price trend. i.e. buy positions should be initiated
on crossing above the zero line only if the market
trend is up and vice-versa.
 Similarly Short positions should be initiated only if the
crossing below the zero line is complemented with a
basic down trend in prices.
 AN OSCILLATOR IS A LEADING INDICATOR WHICH
TURNS EARLY TO THAT OF THE PRICE LINE.

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Oscillators:
 The upper and lower boundary limits can be fixed
based on the previous momentum history.
 There are 3 types of Oscillators:
1. Momentum Oscillators. (V-Vx)
2. Rate of change Oscillators. (V/Vx)
3. Moving Average Oscillators. (Histogram)

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RELATIVE STRENGTH INDEX:
 RSI technique was developed by J.Welles Wilder.
 It is the most popular and trusted Oscillator tool
used by most of the traders, which smoothens the
noise found in most of the other Oscillator tools.
 RSI = 100 – 100 / (1+RS)
 RS = Average of x days UP close
Average of x days DOWN close
 14days is popularly used for the calculation of RSI and
14weeks in case of a Weekly chart being used. However
variations of 14 days are also used. Shorter the time
period, more sensitive the oscillator becomes and wider
is its amplitude.

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RELATIVE STRENGTH INDEX:
 RSI works best at the extreme points of the band.
 5,7 and 9 days are used as variations of the shorter
time period RSI and 21 or 28 days is used for the
longer time duration.
 The 14 days RSI becomes Over bought above 70 and
oversold below 30.
 The study of chart patterns are equally applicable to
even RSI as they are drawn to regular price charts.
 RSI – PRICE Divergence:
If prices are rising or flat and RSI is decreasing, look
for turn down in prices. If prices are declining or flat
and RSI is increasing, expect prices to move higher.

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Negative Divergence:

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Over Bought and Over Sold Situation:

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Top Failure Swing:

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Bottom Failure Swing:

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STOCHASTICS:
 It is based on the observation that as price
increases, closing price will be closer to day’s
high on an uptrend and on a downtrend, closing
price will be closer to day’s low.
 %K line and %D line are the two lines used in
Stochastics.
 Stochastic observes where the most recent
closing price is in relation to the price range for a
chosen time period. (14days is generally used)

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Accumulation-Distribution Pattern:
 It is a variation of On balancing Volume which
attempts to confirm changes in prices by
comparing the volumes associated with it.
 It is a momentum indicator which associates
changes in Price and Volume.
 The indicator is based on the premise that more
the volume that accompanies a price move, more
significant is the move.

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Σ {(C - L) – (H – C)} * Volume
(H – L)
Where:
C = Close.
L = Low.
H = High.
 The nearer the close is to the high’s of the day, more
volume is added to the cumulative total and vice-versa.
 If the close is exactly between the days high and low,
then nothing is added or deducted to the cumulative
total.

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 When security is being accumulated, the A/D
moves up and when the security is being
distributed, the A/D moves downwards.
 When a Negative Divergence occurs between
Price and A/D pattern, Price will usually change
to confirm the A/D.

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ELLIOTT THEORY:
 Proposed by Ralph Nelson Elliott, Wave theory was
improvised by Charles J Collins.
 Elliot was very much influenced by the Dow theory.
 Through constant observations and nature of markets,
Elliott concluded that the movements of stocks can be
predicted by observing repetitive patterns of waves.
 There are 3 basic tenants of Elliott wave theory:
a)Pattern.
b)Ratio.
c) Time.

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BAR CHARTS VS CANDLE STICKS
Studies market psychology much faster and easier
than bar charts. A candles extended real body
demonstrate definite bullishness or bearishness.
However a small real body indicates indecision or a
tug of war between the bulls and the bears with no
definite winner.

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INTRODUCTION
Candle Sticks predict the strong psychology of the
markets, its emotions and future expectations.
“What is important in market fluctuations are not the
events themselves, but the HUMAN REACTIONS to
these events”.

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INTRODUCTION
The use of Candle Stick charts originated in JAPAN
when RICE was the medium of exchange.
Munehisa Homma is considered as the father of Candle
Sticks.
“NEVER PLACE A TRADE WITH A CANDLE SIGNAL
WITHOUT CONSIDERING THE RISK-REWARD
RATIO OF THE POTENT TRADE”

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LIMITATIONS
They need a Close to confirm the Candle Signal.
They don’t give PRICE TARGETS.
Candle Patterns cannot be used in isolation to effect
trades.
Cannot be used on tick charts.

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DEFINTIONS
REAL BODY:
It is the rectangle portion of the Candle that represents
the range between the Opening and Closing Price.
WHITE (GREEN) REAL BODY:
It represents Close being higher than Open.
BLACK (RED) REAL BODY:
It represents Close being lower than Open.

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DEFINTIONS
SHADOW:
It is the Vertical line that extends above and below the
real body called as Upper and Lower Shadows.
The Top of the Upper shadow is the sessions high and
the Bottom being the sessions low.

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DEFINTIONS
SHAVEN HEAD AND BOTTOM:
If the Close is at the High’s of the session, it has no
upper shadow and hence it has a “Shaven Head”.
If the Close is at the Low’s of the session, it has no
lower shadow and hence it has a “Shaven Bottom”.
The top of the upper shadow and the bottom of the
lower shadow represents the high’s and low’s of the
session, whether the real body is White (Green) or
Black (Red).

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TIME FRAMELike BARS, each CANDLE represents action for a
specific time frame. On a daily chart, each candle
represents price action for a day, on a weekly chart for a
week and on a 15 minute intra day chart, a 15 minute
unit of time.
A Long body (either Green or Red) indicate strong
market participation, whereas a Small body indicates
no market participation.

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SIGNALS
EXAMPLE OF A CANDLE
A Long Green real body indicate, extremely POSITIVE
or BULLISH sentiments as the close is many points
above its open and near to its day high.
A Long Red real body indicate, extremely NEGATIVE
or BEARISH sentiments as the close is many points
below its open and near to its day low.

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SIGNALS
The upper shadow indicates that the day’s high
could not be maintained by the Bull’s because of
selling pressure at higher levels or lack of buying
interest at higher levels.
The lower shadow indicates that the Buying came
at lower levels to support the stock price not to go
further below.

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SIGNALS
They believe that the first
hour of the day sets the
tone of the day’s market.
“It is said that the amateur
opens the market and the
professional closes it”.

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STUDY OF SINGLE CANDLES
SPINNING TOPS:
It refers to a Candle (either Green or Red) with
a Small Real Body. Spinning Tops may have
Upper and Lower Shadows or none at all.
A Spinning Top indicate that Bulls and Bears
are battling it out in a tug of war with neither
the bulls nor bears being able to take dominant
control.
Spinning top helps a trader to cover old
positions and not to initiate new positions.

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STUDY OF SINGLE CANDLES
SPINNING TOPS:

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STUDY OF SINGLE CANDLESHIGH WAVE CANDLES:
They also have diminutive real body (either green
or red) like spinning top but also longer upper and
lower shadows. The Upper and Lower shadows
need not be of same size, but should be
substantially long.
High wave candles indicate outright CONFUSION
in the minds of bulls and bears.

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TREND ANALYSIS THRU SPINNING TOPS AND
HIGH WAVE CANDLES
UPTREND:
In an Uptrend supported by long green real
body, small real body (either green or red)
exerts caution on the long side.
Spinning tops are warnings not to follow this
market on the long side and are more powerful
in a market which are becoming over extended
and are nearing resistance levels. A trend shift
or reversal may be in the offering.

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HIGH WAVE CANDLES
SIDEWAYS TREND:
In a Sideways trend or a Box Range, Spinning Tops
and High Wave candles have no implications of
trend reversal or shift. It indicates markets simply
resting before it breaks up or down from the price
range.

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HIGH WAVE CANDLES
DOWN TREND:
In an Down trend supported by long red real
body, small real body (either green or red)
exerts caution on the short side.
Spinning tops are warnings not to follow this
market on the short side and are more
powerful in a market which are becoming over
sold and are nearing Support levels. A trend
shift or reversal may be in the offering.

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HAMMER AND HANGING MAN
The Hammer and Hanging man candles
have small real body (whether green or red)
and should have long single sided shadow.
An HAMMER appears on a down trend at or
near the bottom which suggests that the
market is hammering out a base.
An HANGING MAN appears on an uptrend
at or near the top which suggests that the
market is creating a top. One must wait for
a close under the Hanging man’s real body
before becoming BEARISH.

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SHOOTING STAR
A Shooting Star is a top reversal line just like the
Hanging man. A Shooting Star displays a long
upper shadow and its small real body is at or
near the lows of the session.
A Shooting Star shows trouble overhead.
Because of the Shooting Stars long bearish upper
shadow, we don’t need any confirmation like the
Hanging man.
A Shooting Star is a bearish reversal signal and it
must appear during a rally (Uptrend).

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HAMMER, HANGING MAN AND SHOOTING
STAR

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STAR PATTERN:
A Star is a small real body that
gaps away from the long real body
preceding it in an uptrend or
downtrend. The 3rd
candle should
also gap away from that of the
Star’s real body, leaving the star’s
real body isolated.

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STAR PATTERN:
 Star patterns are of 2 types:
1. Morning Star:
It is a bottom reversal pattern which is a
bullish signal. It is a pattern followed by a
prior down trend and a long red candle
develops confirming the control of bears
being intact is followed by a small real body
(Green or red) gapping down and a gap up
green long real body completes the
morning star pattern.

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STAR PATTERN:
1. Evening Star:
It is a top reversal pattern which is a bearish
signal. It is a pattern followed by a prior up
trend and a long green candle develops
confirming the control of bulls being intact is
followed by a small real body (Green or red)
gapping up and a gap down red long real body
completes the evening star pattern.

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STAR PATTERNS:

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Morning or Evening Doji Stars:

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MORNING STAR PATTERN

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EVENING STAR PATTERN

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THE TWEEZER PATTERN:
Tweezers represents two or more candle lines
with matching highs or lows.
The tweezer top occurs in a rising market and a
tweezer bottom in a falling market.
Generally the first candle in a tweezer will be a
long real body and the second being a small real
body.
A Tweezer too is a strong reversal pattern.

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Tweezers are generally of less
importance to short term traders
and it is more powerful on a long
term chart for indicating reversal
signals.

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THE THREE BLACK CROWS:
It appears in the context of high
price levels and a matured uptrend.
It is also called as three winged
crows.
It consists of three consecutive red
candles that should close at or near
their lows.

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THE THREE BLACK CROWS:
The appearance of three black
crows on a weekly chart is an early
signal of reversal of long term trend
and it should be even confirmed by
other technical indicators for a
better confirmation.

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BLACK CROWS ON WEEKLY CHARTS

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THE THREE WHITE SOLDIERS:
It is a Continuation pattern where
consecutive three long green
candles appear, signaling strength in
the previous uptrend.
Each green candle should close at
or near its high.
Each candle should open within or
close to the prior candles real body.

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The previous trend is not critical for
the above pattern.
The soldiers may begin an upward
rise out of a downside reversal or
may emerge during a rally.
The three white soldiers indicate
positive momentum ahead.

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The three white soldiers should
necessarily not be studied as a buy
signal since overbought markets
generally consolidate or retrace
after prolonged price rises.
Thus the best entry point may be
considered after a pull back to the
support levels.

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THE WINDOW PATTERNS:
They are also called as Disjointed
candles which are continuation
patterns.
They are synonymous with that of
western technical patterns known as
gaps.
A Window is a price zone where no
trade takes place. It is called as
PRICE VACCUM.

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RAISING WINDOW:
A Raising window appears with a
price vacuum between the prior
candles high and the current
sessions low.
A Raising window is a Bullish signal
and hence long positions can be
initiated with it. It indicates Bulls
being in control willing to pay high.

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FALLING WINDOW:
A Falling window appears with a price vacuum
between the prior candles low and the current
sessions high.
A Falling window is a Bearish signal and hence
short positions can be initiated with it. It indicates
bears driving the markets down with no
competition from the bulls.

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oAs windows are Continuation
patterns, it is advisable to trade in
the direction of the window.
oIt is wrong to study the gap of real
bodies as windows. It should be the
gaps of shadows and price vacuum
should be created for a window to
occur.

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