School of Management

SUMMER INTERNSHIP PROJECT

on

Technical Analysis On Indian Stock Market

A Research Project Submitted to Add Value in the

Degree of Masters of Business Administration
(2009-2011)

Faculty Guide Company Guide

Prity Dawer Pradip Agrawal

Head-Corporate Relations SIP Coordinators

Mr. James Pal Prof. Latika Rochlani
& Prof. Hartej Khera

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

I, “Apoorva Murdiya”, a student of School of Management, Sanghvi Institute of

Management & Science, Indore, hereby declare that the work done by me to do the
Summer Internship Project titled “Technical Analysis On Indian Stock Market” is
genuine and authentic.

Name & Signature of the Student

 ACKNOWLEDGEMENT
Note: It is just a specimen acknowledgement to refer; students may adopt any other
standard pattern to express their indebtedness.
I sincerely and religiously devote this folio to all the gem of persons who have openly
or silently left an ineradicable mark on this research so that they may be brought into
consideration and given their share of credit, which they genuinely and outstandingly
deserve.

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.

I express my thanks to Dr. Prashant Gupta, Director (M.B.A. / P.G.D.M.), Sanghvi

Institute of Management and Science, Indore for his considerate support whenever and
wherever needed. I honestly acknowledge the sincere guidance provided by the Head-
Corporate Relations, Mr. James Pal, Mr. Ashutosh Bakshi, Training & Placement Officer,
the Chairperson Prof. Gaurav Singh, Coordinators, Prof. Latika Rochlani & Prof. Hartej
Khera. I express my indebtedness to the management of Sanghvi Institute of
Management and Science, for inspiring us to grab and utilize this opportunity.

With profound sense of gratitude, I would like to truthfully thank a recognizable

number of individuals whom I have not mentioned here, but who have visibly or invisibly
facilitated in transforming this research into a success saga.

Above all, I would like to conscientiously thank the Omnipotent, Omnipresent and
Omniscient God for His priceless blessings!

Name and Signature of Student

 EXECUTIVE SUMMARY

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.

IMPORTANCE AND RELEVANCE OF STUDY

This study comprises of analytical work based on both primary real time data as well
as historical secondary data using different graphs mainly Candlesticks. So it will be of
great help in formulating various investment strategies for future keeping in perspective
both short term and long term goals.

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).

Although technicians recognize the value of information on future economic

prospects of the firm, their position is that such information is not mandatory for a
successful trading strategy. The reason is that whatever the fundamental reason for a
change in the stock price, if the stock price is sluggish to adjust, the analyst should be
able to identify a trend that could be exploited during the adjustment period.
Consequently, the key to successful technical analysis is a lazy response of stock prices to
fundamental supply-and-demand phenomena. Note that this prerequisite is diametrically
opposite to the notion of an efficient market.Practitioners’ reliance on technical analysis
is well documented.Frankel and Froot (1990a) noted that market professionals tend to
include technical analysis in forecasting the market.
There is also a shift away from the fundamentals to technical analysis in the 1980s,
according to a survey done by Euromoney (Frankel and Froot, 1990a). On a market level,
the prevalence of technical analysis is demonstrated by the fact that most real time
financial information services, like Reuters and Telerate, provide detailed, comprehensive
and up-to-date technical analysis information. It is obvious that the frequent upgrading of
technical analysis services is a response to the demand for technical analysis services and
competition among the financial information service providers. The guiding principle of
technical analysis is to identify and go along with the trend. When there is a trend,
whether started by random or fundamental factors, technical methods will tend to
generate signals in the same direction. This reinforces the original trend, especially when
many investors rely on the technical indicators. Thus, even if the original trend were a
random occurrence, the subsequent prediction made by the technical indicator could be
self-fulfilling. This self-fulfilling nature leads to the formation of speculative bubbles
(Froot et al.,1992).
Conrad and Kaul (1988) found that weekly returns were positively auto correlated,
particularly for portfolios of small stocks.
Frankel and Froot (1990b) suggested that the overpricing of the US dollar in the
1980s with respect to the underlying economic fundamentals could be due to the
influence of technical analysis.
 Shiller (1984, 1987) found that irrational investor behaviour resulted in excess bond
and stock market volatility. He also suggested that the October 1987 world-wide stock
market crash could be due largely to technical analysis.

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.

In a comprehensive and influential study Brock, Lakonishok and LeBaron (1992)

analysed 26 technical trading rules using 90 years of daily stock prices from the Dow
Jones Industrial Average up to 1987 and found that they all outperformed the market.
Blume, Easley and O’Hara (1994) show that volume provides information on
information quality that cannot be deduced from the price. They also show that traders
who use information contained in market statistics do better than traders who do not.
Neely (1997) explains and reviews technical analysis in the foreign exchange market.
Neely, Weller and Dittmar (1997) use genetic programming to find technical trading
rules in foreign exchange markets. The rules generated economically significant out-of-
sample excess returns for each of six exchange rates, over the period 1981–1995.
Lui and Mole (1998) report the results of a questionnaire survey conducted in
February 1995 on the use by foreign exchange dealers in Hong Kong of fundamental and
technical analyses. They found that over 85% of respondents rely on both methods and,
again, technical analysis was more popular at shorter time horizons.
Neely (1998) reconciles the fact that using technical trading rules to trade against US
intervention in foreign exchange markets can be profitable, yet, longterm, the intervention
tends to be profitable.
LeBaron (1999) shows that, when using technical analysis in the foreign exchange
market, after removing periods in which the Federal Reserve is active, exchange rate
predictability is dramatically reduced.
Lo, Mamaysky andWang (2000) examines the effectiveness of technical analysis on
US stocks from 1962 to 1996 and finds that over the 31-year sample period, several
technical indicators do provide incremental information and may have some practical
value.
Fern´andez-Rodr´ıguez, Gonz´alez-Martel and Sosvilla-Rivero (2000) apply an
artificial neural network to the Madrid Stock Market and find that, in the absence of
trading costs, the technical trading rule is always superior to a buy and hold strategy for
both ‘bear’ market and ‘stable’ market episodes, but not in a ‘bull’ market. One criticism
I have is that beating the market in the absence of costs seems of little significance unless
one is interested in finding a signal which will later be incorporated into a full system.
Secondly, it is perhaps naïve to work on the premise that ‘bull’ and ‘bear’ markets exist.
Lee and Swaminathan (2000) demonstrate the importance of past trading volume.

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.

 To forecast market scenario for near future based on Technical analysis.

 CHAPTER 2

CONCEPTUAL FRAMEWORK ON TECHNICAL

ANALYSIS

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

Technical analysis is a method of evaluating securities by analyzing the statistics

generated by market activity, such as past prices and volume. Technical analysts do not
attempt to measure a security's intrinsic value, but instead use charts and other tools to
identify patterns that can suggest future activity. Just as there are many investment styles
on the fundamental side, there are also many different types of technical traders. Some
rely on chart patterns; others use technical indicators and oscillators, and most use some
combination of the two. In any case, technical analysts' exclusive use of historical price
and volume data is what separates them from their fundamental counterparts. Unlike
fundamental analysts, technical analysts don't care whether a stock is undervalued - the
only thing that matters is a security's past trading data and what information this data can
provide about where the security might move in the future. The field of technical analysis
is based on three assumptions:
• Market discounts everything.
• Price moves in trends

• History tends to repeats itself.

One of the most important concepts in technical analysis is that of trend. The meaning in
finance isn't all that different from the general definition of the term - a trend is really
nothing more than the general direction in which a security or market is headed.

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).

2.2 Role Reversal

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.

2.4 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.

2.6 Moving Averages

Another method of determining momentum is to look at the order of a pair of moving
averages. When a short-term average is above a longer-term average, the trend is up. On
the other hand, a long-term average above a shorter-term average signals a downward
movement.
Moving average trend reversals are formed in two main ways: when the price moves
through a moving average and when it moves through moving average crossovers. The

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 Other Important Indicators

Indicators are calculations based on the price and the volume of a security that measure
such things as money flow, trends, volatility and momentum. Indicators are used as a
secondary measure to the actual price movements and add additional information to the
analysis of securities. Indicators are used in two main ways: to confirm price movement
and the quality of chart patterns, and to form buy and sell signals.
There are two main types of indicators: leading and lagging. A leading indicator precedes
price movements, giving them a predictive quality, while a lagging indicator is a
confirmation tool because it follows price movement. A leading indicator is thought to be
the strongest during periods of sideways or non-trending trading ranges, while the lagging
indicators are still useful during trending periods.
There are also two types of indicator constructions: those that fall in a bounded range and
those that do not. The ones that are bound within a range are called oscillators - these are
the most common type of indicators. Oscillator indicators have a range, for example
between zero and 100, and signal periods where the security is overbought (near 100) or
oversold (near zero). Non-bounded indicators still form buy and sell signals along with
displaying strength or weakness, but they vary in the way they do this.
The two main ways that indicators are used to form buy and sell signals in technical
analysis is through crossovers and divergence. Crossovers are the most popular and are
reflected when either the price moves through the moving average, or when two different
moving averages cross over each other. The second way indicators are used is through
divergence, which happens when the direction of the price trend and the direction of the
indicator trend are moving in the opposite direction.
Indicators that are used in technical analysis provide an extremely useful source of
additional information. These indicators help identify momentum, trends, volatility and
various other aspects in a security to aid in the technical analysis of trends. It is important
to note that while some traders use a single indicator solely for buy and sell signals, they
are best used in conjunction with price movement, chart patterns and other indicators.

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.

2.7.2 Relative Strength Index

The relative strength index (RSI) is another one of the most used and well-known
momentum indicators in technical analysis. RSI helps to signal overbought and oversold
conditions in a security. The indicator is plotted in a range between zero and 100. A
reading above 70 is used to suggest that a security is overbought, while a reading below
30 is used to suggest that it is oversold. This indicator helps traders to identify whether a
security’s price has been unreasonably pushed to current levels and whether a reversal
may be on the way.
The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted
to meet the needs of the user. If the trading period is adjusted to use fewer days, the RSI
will be more volatile and will be used for shorter term trades.

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.

3.1 LOCALE OF STUDY

The project was done in Indore office of Reliance Securities ltd. The office is basically
Looks after all aspects Stock Broking or Trading activities like Analytics, Online Trading
and Business Development.

3.2 SAMPLE SELECTION

As per the availability of time Primary Real Time data was limited to March to June so
that proper analysis could take place on daily basis 2001 and March 2009. Daily as well
as short duration charts were captured for NSE.
As far as analysis with secondary data is concerned, relevant period after 1991 is focused
at random periods as well during some major events.

3.3 DATA COLLECTION

Primary live data was capture from Real time websites like www.icharts.com or investor
on daily basis where as various website has been used for secondary data which mainly
pertains to long term analysis.

3.4 DATA ANALYSIS

Data analysis is done on the data collected from both the primary and secondary sources.
The main technical tools used are Candlesticks Pattern, Trend lines and Fibonacci
retracements.
Trader must invest after thorough understanding and analysis of Market condition
.Market analysis is generally done by getting data from various resources especially

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.

3.4.3 Exponential Moving Averages

Exponential Moving Averages calculated with short and long period also gives vital
information about nifty movements and reversal signals thus providing information about
when to enter or exit market. Long and short term EMA Crossover gives buy and sell
signal as evident from the chart.
Candlestick pattern below shows highly volatile market period between July 2008 and
June 2008.This period has been a very volatile period full of major events. After a
downward rally which is shown by percentage retracement from 4500 level to 2500 level
with in 2 months, market became range bound for almost 4 months and again
After March market saw an upward rally from levels of 2500 to 4250 which is shown by
Fibonacci retracement.
3.4.4 Resistance and support
After upward or downward movements many a time market movements become sluggish
on both upward and downward direction, such type market is called range bound market.
Here we can see from the chart below that market is range bound between Nov 2008 and
March 2009 though both side of this period market remained highly volatile.

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

4.1 FINDINGS OF THE STUDY

It is observed from the analysis of the primary data that Technical analysis is of great
significance while investing in equities or commodities. It provides right signal at right
time in most of the cases. Use of various indicator makes the analytical task a lot easier
and thus help greatly in indecisive times. As observed during various major events like
Election, Budget etc one must be very cautious and should Technical indicators keeping
in mind short term perspective. Besides this, trend along with confirmation from volume
activities and Oscillators provide buying and selling signal especially from long term
perspective.

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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