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Chairperson Director
Prof. Gaurav Singh Dr. Prashant Gupta
Submitted by:
Apoorva Murdiya MBA(III Sem)
CERTIFICATE FROM COMPANY GUIDE
This is to certify that “Apoorva Murdiya” of MBA (Full Time) Semester III in
Sanghvi Institute of Management and Science, Indore has carried out a Summer
Internship Project titled “Technical Analysis On Indian Stock Market”. The work done
by him/her is genuine and authentic.
The work carried out by the student was found satisfactory. We wish him/her all the
success in career.
Signature
Pradip Agrawal
Centre Manager- Capital
CERTIFICATE FROM FACULTY GUIDE
This is to certify that “Apoorva Murdiya” of MBA (Full Time) Semester III in
Sanghvi Institute of Management and Science, Indore has carried out a Summer
Internship Project titled “Technical Analysis On Indian Stock Market”. The work done by
him/her is genuine and authentic.
The work carried out by the student was found satisfactory. We wish him/her all the
success in career.
Signature
Prity Dawer
DECLARATION
This expedition of research encountered many trials, troubles and tortures along the
way. I am essentially indebted to my guides “Pradip Agrawal and Prity Dawer” for this
sweating learning experience. They overlooked my faults and follies, constantly inspired
and mentored via the proficient direction. It was a privilege to work under their sincere
guidance.
Above all, I would like to conscientiously thank the Omnipotent, Omnipresent and
Omniscient God for His priceless blessings!
Technical Analysis is one of the most popular techniques used to make better
investment decision nowadays. The very fact that it is used by professional hands and so
informed decision is taken before buying or selling equities and or bonds encourages
many investors to venture in to equity market segment.
The title of the project is Technical analysis of stocks. This project is divided into two
stages:
• A study of Technical analysis and
• To analyze Nifty movements with technical analysis indicators
The first stage of this project dealt with comprehending the various aspects of
Technical Analysis with respect to Historical and current market movements of S&P
CNX Nifty. This stage mainly dealt with the analysis of secondary data and helped a lot
to build conceptual framework for the further analysis of current market situation.
The Second Stage mainly dealt with the Technical analysis of current markets based
on primary data pertaining to Nifty Index.
Chapter 1
INTRODUCTION
Major investment instruments to be used in the market are Commodities and Equities
where return is highest in market. As an investor, everyone needs to know their behavior
and pattern before investing in to any Equity or Commodity. So Stock markets become
important benchmark to follow the condition of economy and to devise the investment
strategies for short term and long term. This study mainly tries to capture the
effectiveness of Technical Analysis while formulating investment strategies by analyzing
Secondary as well as primary data available on nifty index.
LITERATURE REVIEW
The use of market timing has long been the subject of much discussion. Several
researchers question the usefulness of such techniques, arguing that such techniques
usually cannot produce better returns than a buy-and-hold (B-H) strategy. Many filter
rules were tested on the US stock market, with most of them concluding that filter rules
do not generate superior returns to the B-H strategy. If the cost of transactions were
considered, the returns could even be negative (Fama and Blume, 1966; Jensen and
Benington 1970). These results are consistent with the efficient markets hypothesis. This
hypothesis implies that technical analysis is without merit. In an efficient market, the
current price reflects all available information including the past history of prices and
trading volume. As investors compete to exploit their common knowledge of a stock’s
price history, they necessarily drive stock prices to levels where expected rate of return
are exactly commensurate with risk. At those levels one cannot expect abnormal returns
(see Fama, 1970).
Fama and French (1988) proposed a mean reverting model to explain stock price
movements. They also found that autocorrelation of returns become strongly negative for
a 3–5 year horizon.
DeBondt and Thaler (1985, 1987) found that stocks that were extreme losers over a
3–5 year period tend to have strong returns relative to the market during the following
years. Conversely, extreme winners tend to have weaker returns in subsequent years.
Sy (1990) had argued against Sharpe’s (1975) conclusion, saying that there was no
need for the predictive accuracy to be as high as 70% for the gains to be large. In
addition, he demonstrated that market timing would be increasingly rewarding when the
difference in returns between cash and stocks were narrowed and when market volatility
increased.
Balvers et al. (1990) show empirically that stock returns could be predicted based on
national aggregate output.
Other studies have shown that some fundamental data like price earnings ratio,
dividend yields, business conditions and economic variables can predict to a large degree
the returns on stocks (Campbell, 1987; Campbell and Shiller, 1988a, 1988b; Fama and
French, 1989; Breen et al., 1990, among others). For further innovations, see Wong
(1993, 1994) and Wong et al. (2001).
Brown and Jennings (1989) showed that technical analysis has value in a model in
which prices are not fully revealing and traders have rational conjectures about the
relation between prices and signals.
Frankel and Froot (1990) showed evidence for the rising importance of chartists.
Neftci (1991) showed that a few of the rules used in technical analysis generate well-
defined echniques of forecasting, but even well-defined rules were shown to be useless in
prediction if the economic time series is Gaussian. However, if the processes under
consideration are non-linear, then the rules might capture some information. Tests
showed that this may indeed be the case for the moving average rule.
Taylor and Allen (1992) report the results of a survey among chief foreign exchange
dealers based in London in November 1988 and found that at least 90 per cent of
respondents placed some weight on technical analysis, and that there was a skew towards
using technical, rather than fundamental, analysis at shorter time horizons.
Neely and Weller (2001) use genetic programming to show that technical trading
rules can be profitable during US foreign exchange intervention.
Cesari and Cremonini (2003) make an extensive simulation comparison of popular
dynamic strategies of asset allocation and find that technical analysis only performs well
in Pacific markets.
Cheol-Ho Park and Scott H. Irwin wrote ‘The profitability of technical analysis: A
review’ Park and Irwin (2004), an excellent review paper on technical analysis.
Kavajecz and Odders-White (2004) show that support and resistance levels coincide
with peaks in depth on the limit order book 1 and moving average forecasts reveal
information about the relative position of depth on the book.They also show that these
relationships stem from technical rules locating depth already in place on the limit order
book.
More recently, Lo et al. (2000) examined the prevalence of various technical patterns
in American share prices over the period 1962–1996 and found the patterns to be
unusually recurrent.The study does not prove that the patterns are predictable enough to
make sufficient profit to justify the risk,but the authors conclude that this is likely.
OBJECTIVE
To study the applicability of Technical analysis to stock markets using Nifty
To identify and sort out simple Technical analysis tool relevant for the
formulation of various investment strategies.
Analysis of Stock Market movements during various cyclic events.
The methods used to analyze securities and make investment decisions fall into two very
broad categories: fundamental analysis and technical analysis. Fundamental analysis
involves analyzing the characteristics of a company in order to estimate its value.
Technical analysis takes a completely different approach; it doesn't care one bit about the
"value" of a company or a commodity. Technicians or chartists are only interested in the
price movements in the market.
Despite all the fancy and exotic tools it employs, technical analysis really just studies
supply and demand in a market in an attempt to determine what direction, or trend, will
continue in the future. In other words, technical analysis attempts to understand the
emotions in the market by studying the market itself, as opposed to its components
Above figure is an example of an uptrend. Point 2 in the chart is the first high, which is
determined after the price falls from this point. Point 3 is the low that is established as the
price falls from the high. For this to remain an uptrend each successive low must not fall
below the previous lowest point or the trend is deemed a reversal.
2.1 Trendline
A trendline is a simple charting technique that adds a line to a chart to represent the trend
in the market or a stock. Drawing a trend line is as simple as drawing a straight line
As you can see in following figure, an upward trendline is drawn at the lows of an
upward trend. This line represents the support the stock has every time it moves from a
high to a low.
Support and resistance analysis is an important part of trends because it can be used to
make trading decisions and identify when a trend is reversing
As you can see in Figure, support is the price level through which a stock or market
seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price
level that a stock or market seldom surpasses (illustrated by the red arrows).
Once a resistance or support level is broken, its role is reversed. If the price falls below a
support level, that level will become resistance. If the price rises above a resistance level,
it will often become support. As the price moves past a level of support or resistance, it is
thought that supply and demand has shifted, causing the breached level to reverse its role.
For a true reversal to occur, however, it is important that the price make a strong move
through either the support or resistance
For example, as you can see in Figure, the dotted line is shown as a level of resistance
that has prevented the price from heading higher on two previous occasions (Points 1 and
2). However, once the resistance is broken, it becomes a level of support (shown by
Points 3 and 4) by propping up the price and preventing it from heading lower again.
Support and resistance levels both test and confirm trends and need to be monitored by
anyone who uses technical analysis. As long as the price of the share remains between
these levels of support and resistance, the trend is likely to continue.
2.3 Charts
In technical analysis, charts are similar to the charts that you see in any business setting.
For example, a chart may show a stock's price movement over a one-year period, where
each point on the graph represents the closing price for each day the stock is traded.
There are several things that you should be aware of when looking at a chart, as these
factors can affect the information that is provided. They include the time scale, the price
scale and the price point properties used. If a price scale is constructed using a linear
scale, the space between each price point (10, 20, 30, 40) is separated by an equal
amount. A price move from 10 to 20 on a linear scale is the same distance on the chart as
a move from 40 to 50. In other words, the price scale measures moves in absolute terms
and does not show the effects of percent change.
If a price scale is in logarithmic terms, then the distance between points will be equal in
terms of percent change. A price change from 10 to 20 is a 100% increase in the price
while a move from 40 to 50 is only a 25% change, even though they are represented by
the same distance on a linear scale. On a logarithmic scale, the distance of the 100% price
change from 10 to 20 will not be the same as the 25% change from 40 to 50. In this case,
the move from 10 to 20 is represented by a larger space one the chart, while the move
from 40 to 50, is represented by a smaller space because, percentage-wise, it indicates a
smaller move. In Figure, the logarithmic price scale on the right leaves the same amount
of space between 10 and 20 as it does between 20 and 40 because these both represent
100% increases.
There are four main types of charts that are used by investors and traders depending on
the information that they are seeking and their individual skill levels. The chart types are:
the line chart, the bar chart, the candlestick chart and the point and figure chart. As our
analysis will be using more of candle sticks so here is the brief description about
candlestick charts.
The candlestick chart is similar to a bar chart, but it differs in the way that it is visually
constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing
the period's trading range. The difference comes in the formation of a wide bar on the
vertical line, which illustrates the difference between the open and close. And, like bar
charts, candlesticks also rely heavily on the use of colors to explain what has happened
during the trading period. A major problem with the candlestick color configuration,
however, is that different sites use different standards; therefore, it is important to
understand the candlestick configuration used at the chart site you are working with.
There are two color constructs for days up and one for days that the price falls. When the
price of the stock is up and closes above the opening trade, the candlestick will usually be
white or clear. If the stock has traded down for the period, then the candlestick will
usually be red or black, depending on the site. If the stock's price has closed above the
previous day’s close but below the day's open, the candlestick will be black or filled with
the color that is used to indicate an up day.
Charts are one of the most fundamental aspects of technical analysis. It is important that
you clearly understand what is being shown on a chart and the information that it
provides. Now that we have an idea of how charts are constructed, we can move on to the
different types of chart patterns. A chart pattern is a distinct formation on a stock chart
that creates a trading signal, or a sign of future price movements. Chartists use these
patterns to identify current trends and trend reversals and to trigger buy and sell signals.
While there are general ideas and components to every chart pattern, there is no chart
pattern that will tell you with 100% certainty where a security is headed. This creates
some leeway and debate as to what a good pattern looks like, and is a major reason why
charting is often seen as more of an art than a science.
2.5 Patterns
There are two types of patterns within this area of technical analysis, reversal and
continuation. A reversal pattern signals that a prior trend will reverse upon completion of
the pattern. A continuation pattern, on the other hand, signals that a trend will continue
once the pattern is complete. These patterns can be found over charts of any timeframe.
In this section, we will review some of the more popular chart patterns. We will now
move on to other technical techniques and examine how they are used by technical
traders to gauge price movements.
Most chart patterns show a lot of variation in price movement. This can make it difficult
for traders to get an idea of a security's overall trend. One simple method traders use to
combat this is to apply moving averages. A moving average is the average price of a
security over a set amount of time. By plotting a security's average price, the price
movement is smoothed out. Once the day-to-day fluctuations are removed, traders are
better able to identify the true trend and increase the probability that it will work in their
favor.
first common signal is when the price moves through an important moving average. For
example, when the price of a security that was in an uptrend falls below a 50-period
moving average, like in Figure below, it is a sign that the uptrend may be reversing.
The other signal of a trend reversal is when one moving average crosses through another.
For example, as you can see in Figure below, if the 15-day moving average crosses above
the 50-day moving average, it is a positive sign that the price will start to increase.
If the periods used in the calculation are relatively short, for example 15 and 35, this
could signal a short-term trend reversal. On the other hand, when two averages with
relatively long time frames cross over (50 and 200, for example), this is used to suggest a
long-term shift in trend.
2.7.1 MACD
The moving average convergence divergence (MACD) is one of the most well known
and used indicators in technical analysis. This indicator is comprised of two exponential
moving averages, which help to measure momentum in the security. The MACD is
simply the difference between these two moving averages plotted against a centerline.
The centerline is the point at which the two moving averages are equal. Along with the
MACD and the centerline, an exponential moving average of the MACD itself is plotted
on the chart. The idea behind this momentum indicator is to measure short-term
momentum compared to longer term momentum to help signal the current direction of
momentum.
When the MACD is positive, it signals that the shorter term moving average is above the
longer term moving average and suggests upward momentum. The opposite holds true
when the MACD is negative - this signals that the shorter term is below the longer and
suggest downward momentum. When the MACD line crosses over the centerline, it
signals a crossing in the moving averages. The most common moving average values
used in the calculation are the 26-day and 12-day exponential moving averages. The
signal line is commonly created by using a nine-day exponential moving average of the
MACD values. These values can be adjusted to meet the needs of the technician and the
security. For more volatile securities, shorter term averages are used while less volatile
securities should have longer averages.
Another aspect to the MACD indicator that is often found on charts is the MACD
histogram. The histogram is plotted on the centerline and represented by bars. Each bar is
the difference between the MACD and the signal line or, in most cases, the nine-day
exponential moving average. The higher the bars are in either direction, the more
momentum behind the direction in which the bars point. As you can see in Figure
following, one of the most common buy signals is generated when the MACD crosses
above the signal line (blue dotted line), while sell signals often occur when the MACD
crosses below the signal.
2.7.3 Stochastic
The stochastic oscillator is one of the most recognized momentum indicators used in
technical analysis. The idea behind this indicator is that in an uptrend, the price should be
closing near the highs of the trading range, signaling upward momentum in the security.
In downtrends, the price should be closing near the lows of the trading range, signaling
downward momentum.
The stochastic oscillator is plotted within a range of zero and 100 and signals overbought
conditions above 80 and oversold conditions below 20. The stochastic oscillator contains
two lines. The first line is the %K, which is essentially the raw measure used to formulate
the idea of momentum behind the oscillator. The second line is the %D, which is simply a
moving average of the %K. The %D line is considered to be the more important of the
two lines as it is seen to produce better signals. The stochastic oscillator generally uses
the past 14 trading periods in its calculation but can be adjusted to meet the needs of the
user.
CHAPTER 3
METHODOLOGY OF STUDY
This section deals with the actual process adopted to carry out the study. It consists of the
universe and locale of study, sample selection, data collection and process of data
analysis.
current trend and movements. Trading activity in equity is done online during market
hours from 10:00 am to 3:30 pm (Monday to Friday).Generally very sensitive online
software like Metastock is being used to see and analyse current day today market
movements. Various software tools giving information or indication on market
movements which are usually used by technical analysts at High end are as follow
• Metastock
• Investar
• Spider
Even brokerage houses are also providing online trading tools with facilities of trading to
there clients as per specific requirements. Below are the Trading tool snap shot giving
online information of equities pertaining to Last trading price, High and low.
Trading software generally provided by various brokerage houses to its clients is
ODIN .Shown here is the snapshot of ODIN online window with various functionalities
like price watch, order entry, order book etc.
These types of trading tools just gives a online platform to see online prices and execute
buying and selling activities but these doesn’t provide enough information on analytical
information or insight as when to buy or sell. So we can say these may provide just data
but no analysis.
Analytical aspect is taken care by Technical analyst by looking at the various Technical
indicators like Line and Candlesticks charts and Oscillators. Technical analysts know
how to read various indicators and interpret how the market will behave in short and long
term. So here we will study and analyze secondary and primary data taken from from
various Tools and website keeping in mind both long term and short term perspectives.
Our study mainly concentrate on nifty charts.
Analysis based on different parameter is as follow
3.4.1 Trendlines
Here we have nifty line chart from 1991 to 2000 showing market behaviour in long term
with the help Trendline as indicator. So a long term investor can get selling and buy
signal by see-
Ing and studying trendlines. We can also observe the cyclic up and down movement of
the market for 10 years .Here we are clearly getting buy signal below 900 and respective
selling signal at more than 300 points profit. In the last rally after getting buy signal
below 900, nifty rose as high as 1500 .So trend line speak a lot about price movement in
long term which is clearly evident from the line graph.
3.4.2 Volume
Along with trendlines volume movement is also used as indicator which generally
confirms the move of the market as a indicator.
Here the line graph shows an upward movement 2003 onwards with the help of trend line
which is clearly being confirmed by rising volume. Also fall in volume during July –
august 2008 predicted the fall of market in near future. So we can say that volume also
plays important role as confirmatory indicator along with upward or downward trend.
Here from the candlesticks chart Hammer formation after downward rally indicated
reversal of the market move. After this market moved in range with lower support at 2500
and upper resistance at 3328. But the breaking of upper resistance in beginning of April
confirmed the upward rally.
3.4.5 Oscillators
Oscillators like Relative Strength Index (RSI), MACD and Stochastic are also
prominently used for confirmation of moves given by Trends .Especially when market
becomes range bounds and moves sideways in low range , it is prudent to use oscillators
for Buying and selling signals. As seen from the graph below for range bound market,
indicators like RSI, MACD and Stochastics gives frequent indication of buying or selling.
Though this sideways market is risky to invest but still range is from 2600 to 3100 thus
giving a range of 500 points to play. So to be on safer side in such market one should use
Oscillators in such markets.
3.4.6 Fibonacci and Percentage Retracement
If we critically analyze market in the near term from 9th March to 20th May, it had
clearly followed Fibonacci retracement by retracing from 50 % to 61.8% gaining almost
200 points near 4th May and then again retracing from 61.8 % to 100% with gain of 700
points after election results. Thus we see here that such events of uncertainty can lead to
anything ,heavy gains as well as heavy losses if speculations are wrong but technical’s
like Fibonacci retracement give the clear picture of risk quantum.
On Friday just before the declaration of election results there was uncertainty about the
market movement as the stability of Government affects the market a lot which evident
from the market during this election.
3.4.7 Volatility during elections
Generally during election phase and till the results are announced, uncertain conditions
prevail which make the market volatile. There are unanswered questions like which
Government will be in power and what will be the policy map? So investment should be
done cautiously and prudently during election phase.
Period of just 40 months from 1996 to 1999 saw 3 Loksabha elections due unstable
coalition governments which resulted into highly volatile market during this period.
Below chart from 1994 to 1997 shows that 1996-1997 phase remained highly volatile
with high frequency of ups and downs.
Chart below also shows erratic behavior of market during 1997-1999 due to unstable
govt. because of lack majority with any single party.
On the contrary when on Oct 13, BJP Government came into with stability and remain in
power for 5 years ,market also followed a trend .At the same time at completion of term
of BJP Government and Congress being the next Govt. in power on 13th May
2004,Market saw a sudden fall.
Recently after the results of these election also on 18th May 2009, again Market saw a
sudden surge and first time in history of India stock market it experienced 2 upper circuit
with minutes of opening on Monday. Reason may be the same Government again coming
back to power with full majority.
3.4.8 Candlesticks
Candlesticks pattern is highly sophisticated technique where specific patterns of candles
in a candlestick chart are identified which give prior indication of market movements.
Here we have captured some real time daily data on candlestick charts and market
movement analysis has been made accordingly.
In the candlestick chart for 3rd June, 2009 there few pattern formations which give
indication for future market moves. At 11am formation of Evening Star pattern indicated
that market is ready for reversal which is further strengthened by formation of Three
Inside Down. With in one hour of this confirmatory signal market slide down by 80 nifty
points. Further reversal of downward trend takes place with Hammer formation and trend
shift upwards.
But sometimes market moves in very narrow range as in this case of 27th May, 2009,
where market moved in narrow range till 1:30pm as per candlestick pattern. So in such
scenario investor is not sure about the continuation of pattern. Here comes the role of
Oscillators which give early indication to take buying or selling position. In this specific
case being discussed RSI and Stochastic Indicator give early signal about the downward
trend, thus giving investor to short his position in advance.
Early formation of Two Bullish Engulfing Pattern on 4th June, 2009, gives indication of
upward market movement so investor can go long for time being. These indication are
also confirmed by EMA crossovers.
In this we observe that its very simple to analyse and intpret Candlestick charts and thus
thus providing valuable insight to investor.
Finally we see that various indicators used being used in Technical analysis of stock
market are very helpful to make critical decision about investment timings with
preciseness.
CHAPTER 4
CONCLUSION
4.2 RECOMMENDATIONS
Technical analysis is helpful in more than 80% cases but still there is need to decide trade
off between profit and loss. So investment must be done prudently.
Risk should be minimized while uncertain period by hedging your investment or keeping
away from market during volatile times if we are not sure of which way the market will
move. Generally when market becomes range bound and we are not in position to find
out which way the market will move, we should liquidate our positions.
We should always keep in mind whether we are investing for long term or short term and
accordingly we should analyze the situation. For short term, along with trend we must
also look for what the confirmatory indicator say.
Along with Technical analysis, one must keep track records of Fundamental analysis as it
makes overall analysis more precise.
4.3 LIMITATIONS AND FURTHER SCOPE OF STUDY
Time scale for data used is more than 10 min ,so for better results time scale must be
minimized to minimum possible so that very sensitive results can be produced.
Due to Limited resources and limited time analysis remained confined to Nifty index and
to random small sample, so analysis may not exactly same for the whole population.
Further study can be taken up by exploring different industrial sector along with Nifty
and sample horizon could be increased to maximum possible. Raw data should be
extracted from more advanced trading tools like Metastock so that sensitivity and
accuracy of analysis could be maximized.
REFERENCES
www.investopedia.com/technical analysis
www.bseindia.com
www.nseindia.com
www.moneycontrol.com
John J.Murphy- Technical Analysis of Financial Markets
Steven B. Achelis- Technical Analysis from A-Z
Capitaline plus
Investar
Company database
Metastock
http://www.icharts.in/charts.html
http://indialivecharts.com/charts.aspx?Name=NSE%20NIFTY&ID=2
BIBLIOGRAPHY
• Donald E. Fisher and Ronald J. Jordan, “Security Analysis And Portfolio
Management”.
• V.A. Avadhani, “Investment and Security Markets In India”.
• Getting Started in Technical Analysis" 1999 Jack D. Schwager.
• Taylor, Mark P., and Helen Allen (1992). "The Use of Technical Analysis in the
Foreign Exchange Market," Journal of International Money and Finance.
• V.K. Bhalla “Investment Management: Security Analysis And Portfolio
Management”.
• John J. Murphy, Technical Analysis of the Financial Markets.
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