Technical Analysis Rudramurthy

TECHNICAL ANALYSIS

RUDRAMURTHY BV

@ B.V.RUDRAMURTHY 1

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.

@ B.V.RUDRAMURTHY 2

ASSUMPTIONS:
 Current Price of an underlying asset
discounts all information.

 Price always moves in trends.

 History repeats often.

@ B.V.RUDRAMURTHY 3

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, 4. PRICE, VOLUME AND OPEN
INDUSTRY AND COMPANY INTEREST ANALYSIS.
ANALYSIS.

5. APPLIED FOR FEW
MARKETS UNDER STUDY.
5. CAN BE APPLIED TO ANY
MARKET AND INSTRUMENT.
@ B.V.RUDRAMURTHY 5

ADVANTAGES:
 Can be used on any markets and on any
underlying asset.
 Takes care of fundamental analysis.
 Helpful for short term traders and
speculators.
 Helps in understanding market psychology.
 Helps in economic forecasting.

@ B.V.RUDRAMURTHY 6

LIMITATIONS:
 It is a Probabilistic study and not deterministic
study.
 Chart Patterns are very subjective in nature.
 Does not works accurately for illiquid markets
and underlying assets with controlled regime.
 Past may not be the indicator of future.
 Random walk theory.
 Contradicting views by different indicators.

@ B.V.RUDRAMURTHY 7

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.

@ B.V.RUDRAMURTHY 8

DOW THEORY
CHARLES DOW
&
NELSON

@ B.V.RUDRAMURTHY 9

DOW THEORY:
 Ideas of Charles Dow, propounded by
NELSON.
 Assumptions of Dow theory:
a) The Market indices discounts everything.
b) The market has 3 trends, namely:
5. Primary Trend. (Major trend).
6. Secondary Trend. (Intermediate trend).
7. Minor Trend. (Short term trend).

@ B.V.RUDRAMURTHY 10

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.


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.


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.


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:
e) ACCUMULATION PHASE.
f) PUBLIC PARTICIPATION PHASE.
g) DISTRIBUTION PHASE.


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.


FAILURE SWING:
B
C

E
A
D

The rally at point B is higher than point A, but the rally at
point C fails to exceed the previous rally at point B. This
indicates reversal of uptrend and the point below the
neck line i.e. D – E indicates a failure swing.


FAILURE SWING:
C
B
E G
A
D H

F

The rally at point B is higher than point A, and the
rally at point C is higher than that of rally at point B;
But it falls below D and few theorists sells at a break
out Point below E.
While others would like to wait to see a lower high at
point G to confirm the lower high as well as lower
lows and then sell at a Point below H.

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.


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.

Dow theory applied to Derivatives instrument:
 Dow assumed most of the investors only trade
major trend; Whereas in reality traders in futures
market generally trend intermediate trend which was
unimportant according to Dow’s assumption.
 Minor Swings are more important than Major
Swings.
 Keeping in mind the above differences, Dow theory
can be applied even to derivatives market.


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.


 Based on the investors time period,
Daily or Weekly or Monthly charts can be
used.
 Arithmetic Vs Logarithmic Scale:
On an Arithmetic Scale, Price change
shows an equal distance for each unit of
price change whereas in an Logarithmic
Scale, Price change shows an equal
distance for equal percentage change.


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.

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.

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.

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. @ B.V.RUDRAMURTHY 33

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.


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.



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.


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.


 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.

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.

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.

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. @ B.V.RUDRAMURTHY 41

Steepness of the Trendline:
 Generally most important trendlines approximate
0
an average slope of 45 .
 Generally if trendlines are too steep or flat, it may
not be an indication of a sustainable Trendline
projections and the same shall not be trusted for.
 Multiple trends like major, intermediate and short
term are studied in tandem for a better picture.
 Thus it is said, “Remember the Rembrandt” i.e.
the big picture.


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.


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.

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.


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.

SPEED RESISTANCE LINES:
 It combines percentage retracements and
trendline techniques.
 This technique was developed by Edson
Gould.
 Speed lines measure the rate of ascent or
descent of a trendline.
 Speed lines are always drawn vertically in
the opposite direction from the highest or the
lowest point.

 If an uptrend is in the process of correcting
itself, the downside correction will usually stop at
the higher speed line (2/3). If not prices will fall to
the lower speed line (1/3). If the lower line is also
broken then prices may move down to retrace
100% of the previous trend. Fall in prices below
this point is a signal of reversal of the trend.
 Incase of a downtrend, breaking of the lower
lines is an indication of the prices rallying
towards the upper line. If it is broken too then it is
a signal of reversal of the trend.

 Fibonacci lines are drawn in same as to
speed lines, but at 38% and 62% levels.
 Gann lines are also similar to speed
resistance where the most important Gann line
is drawn at 450 angle. Steeper Gann lines are
drawn in an uptrend at 63.750 and 750 angle.
Flatter Gann lines are drawn at 26.250 and 150
angles.


REVERSAL DAYS:
 It should not be studied in isolation.
 It should be considered along with other technical
indicators.
 A Reversal day takes place either at the top or at the
bottom.
 Wider the range for the day, and higher the volumes,
more significant is the trend reversal pattern.
 Generally both the highs and lows on the reversal
days, exceed the range for the previous day.
(OUTSIDE DAY) @ B.V.RUDRAMURTHY 52

TOP REVERSAL DAY:
 A Top Reversal Day is defined as setting of a
new high in an uptrend (Generally during the,
opening or early part of the day) and it is
followed by a lower close on the same day,
sometimes the close being below the lows of
the previous day close.


BOTTOM REVERSAL DAY:
 A Bottom Reversal Day is defined as setting
of a new low in an down trend (Generally
during the, opening or early part of the day)
and it is followed by a higher close on the
same day, sometimes the close being higher
than the previous days close.


SIGNIFICANT REVERSAL DAYS:

REVERSAL DAYS ARE MORE KEENLY WATCHED ON
WEEKLY AS WELL AS MONTHLY CHARTS.

CHARTISTS GIVE MORE SIGNIFICANCE TO WEEKLY
CHART REVERSAL THANDAILY CHART REVERSAL AND
MORE SIGNIFICANCE TO MONTHLY THAN WEEKLY.

 VOLUME CONFIRMATION ON A REVERSAL DAY IS
ALSO SEEN FOR BETTER PREDICTIONS.


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.

TYPES OF GAPS:
 BREAK AWAY GAPS.

 RUNAWAY GAPS.

 EXHAUSTION GAPS.


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.


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.


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.

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.


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.


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.

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.

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.

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.


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.

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.

CAUTION:
 HEAD AND SHOULDER PATTERN CAN
ALSO ACT AS A CONSOLIDATION
PATTERN, RATHER THAN REVERSAL
PATTERN.


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.


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.


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.


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.


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”.

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.


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


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.

A

C

B @ B.V.RUDRAMURTHY 80

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”.

A
C


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”.

A

C

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.

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 @ B.V.RUDRAMURTHY and resistance in a 86
an up trend
down trend.

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.
D

A

C


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. @ B.V.RUDRAMURTHY 88

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.

BROADENING PATTERNS:
E

C

A

B
D

F


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. @ B.V.RUDRAMURTHY 91

 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.

 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.


WEDGE FORMATION:
 A Wedge is similar to that of a symmetric
triangle both in terms of its shape and time
except for its slant.
 A Wedge usually lasts more than 1 month but
not more than 3 months.
 A Wedge has a noticeable slant either to the
upside or the downside which is opposite to that
of prior trend i.e. it slants against the previous
trend. (Like flag pattern)
 A Wedge can either be a falling Wedge or a
raising Wedge.

WEDGE FORMATION:
 A Falling Wedge is considered to be bullish and a
raising wedge bearish.
 Wedges often occur within the existing trend and are
usually continuation patterns. However appearance of
wedge at the top or bottom signifies reversal of the
trend.
 A raising wedge at the end of a top is an early signal of
beginning of a down trend.
 A falling wedge at the bottom signifies end of the bear
trend.
 Whether a Wedge appear at the middle or end of the
move, the general rule of raising wedge is a bearish
signal and a falling wedge is a bullish signal should be
kept in mind.

FALLING WEDGE (BULLISH):

E

C
A
G

D
B
F


RAISING WEDGE (BEARISH):

A
E
C

D
B
F


RECTANGLE FORMATION:
 It is a continuation pattern, where price moves
sideways in between two parallel horizontal lines.
 Volume should be heavy on breakout.
 Short term traders buy at the lower band of the
rectangle and sell at the higher end.
 Similar to that of a channel line except the trend is
sideways.
 Formation of a rectangle takes 1 to 3 months.
 The height of the trading range can be used as a
measuring yard to fix price target from the breakout
point.

CONTINUATION H & S PATTERN:
 If an Head and Shoulder pattern occurs on
a down trend or an Inverted Head and
Shoulder pattern on an uptrend, it is
considered to be a continuation pattern
instead of reversal pattern.
 Prior trend before the formation of an
head and shoulder pattern identifies
whether it is a reversal or a continuation
pattern.


VOLUME AND OPEN INTEREST:
 Among the 3 indicators used in technical analysis,
Price is always considered as the Primary indicator,
whereas Volume and Open interest are considered
to be secondary indicators.
 Volume is the number of entities traded or
exchanged hands in a particular time period.
 Volumes are predominantly used in daily charts and
weekly charts, but are very rarely used in monthly
charts.
 Volume precedes price and hence chartist consider
it as an early signal of future Price Movements.

OPEN INTEREST:
 Open Interest refers to the total number of
outstanding or un liquidated contracts at the
end of the day.
 Open interest represents the total number of
Outstanding longs or shorts contracts and not
the total of the both.
 One contract is represented by both buyer as
well as seller.


CHANGES IN OPEN INTEREST:

BUYER SELLER CHANGE

1. Buys new Sells new INCREASES
long short
2. Buys new Sells old long NO CHANGE
long
3. Buys old Sells new NO CHANGE
short short
4. Buys old Sells old long DECREASES
short

OPEN INTEREST:
 Thus if both participants in a trade are
initiating a new position, the Open Interest
will increase.
 If both the participants are liquidating
their old positions, the Open Interest will
decline.
 However if one is initiating a new position
and an other liquidating his old position,
there is no change in the open interest.

STUDY OF VOLUME AND OPEN INTEREST:
PRICE VOLUME OPEN MARKET
INTEREST
RISING UP UP STRONG

RISING DOWN DOWN WEAK

DECLINING UP UP WEAK

DECLINING DOWN DOWN STRONG


On Balance Volume (OBV):
 Developed and Popularized by Joseph
Granville in 1963.
 OBV is a curved line which confirms the
continuation of the previous trend or
warns the beginning of a reversal trend.
 If Price and OBV lines converges, then it
is a bullish pattern and divergence of
these lines indicate reversal of the trend.


MONEY FLOW INDEX:
 Developed and Popularized by Laszlo
Birinyi.
 It is a minor variation over OBV where the
level of Volume on each price range is
determined to know the money flow into
and outside the stock.
 If Price and MFI lines converges, then it is
a bullish pattern and divergence of these
lines indicate reversal of the trend.

MONEY FLOW INDEX:
 Developed and Popularized by Laszlo Birinyi.
 It is a minor variation over OBV where the
level of Volume on each price range is
determined to know the money flow into and
outside the stock.
 If Price and MFI lines converges, then it is a
bullish pattern and divergence of these lines
indicate reversal of the trend.
 Calculation of Put - Call open interest ratio.

LONG TERM CHART ANALYSIS:
 On the Weekly and Monthly charts, each
bar represents one week and one months
price action respectively.
 The purpose of weekly and monthly
charts is to compress the price action so
as to expand the time horizon and to look
at the bigger picture.
 Followers of Random walk theory criticize
the use of short term charts, whereas the
long term charts are against the claim of

random walk.

LONG TERM CHART ANALYSIS:
 Interpretation of Price patterns on a Long term
chart is same as that of a daily chart.
 The practical approach to study of charts at
different time periods should be from long term
charts to short term charts. (Zeroing down
Approach)
 It is a policy of moving from Macro to Micro
approach or moving big to small picture.
 Long term charts should not be used for timing
the market and for trading purposes.

INDICATORS
IN
CHART ANALYSIS


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


MOVING
AVERAGES


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.

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.

MOVING AVERAGES:
 When the Closing Prices move above the
Moving Average, a Buy signal is generated and
if it moves below the moving average, a Sell
signal is generated.
 A Shorter period Moving average gives an early
signal in comparison to longer period average,
it also generates lots of noise and whipsaws.
 The longer average works better when the
trend remains in motion and shorter averages
work better when the trend is reversing.

MOVING AVERAGES:
 Using 2 averages to generate signals is called
as “Double Cross Over Technique”.
 A Buy Signal is generated when the Shorter one
crosses the longer one and vice-versa.
 5 and 20days (Popular among future traders),
10 and 50 days (Popular among stock traders)
moving averages are considered to be very
popular cross over periods.
 The double cross over technique produces
lesser whipsaws in comparison to Single
moving averages.

MOVING AVERAGES:
 Using 3 averages to generate signals is called
as “Triple Cross Over Technique”.
 4-9-18 days moving averages are considered
to be very popular Triple Cross over periods.
 The shorter the moving average period, more
closer they move towards the price. Thus in an
uptrend, 4 day average should be higher than
9 day average, and 9 day higher than 18 day
average and vice-versa in a down trend.


MOVING AVERAGES:
 A buy signal alert is given when in an
down trend, 4day crosses over 9day and it
is confirmed when 9day crosses over
18days.
 A Sell signal alert is given when in an
Uptrend, 4day crosses down wards over
9day and it is confirmed when 9day
crosses down wards over 18days.


MOVING AVERAGES:
 Moving average works only incase of
trending market and not incase of
sideways market.
 Moving averages can be used not only on
Price but also on any technical data like
Volume, Open interest etc.


BOLLINGER
BANDS


BOLLINGER BANDS:
 Developed by John Bollinger.
 Using Standard deviation, Upper and Lower
bands are fixed above and below the moving
average.
 Prices are said to be overextended if they
touch the upper band and are considered to
be oversold if they touch the lower band.
 Generally they are plotted around a 20 day
moving average and standard deviation on the
either side covers at around 95% of the price
data. @ B.V.RUDRAMURTHY 126

BOLLINGER BANDS:
 It is also used on Weekly charts so as to predict
overbought and oversold situations.
 The Upper band and the Lower band is used as Price
Targets on the either sides and the 20day moving
average as the neckline.
 Bollinger band expands or contracts based on the last
20days volatility of the script.
 If the distance between the upper and lower band
narrows, it is an early signal of anticipated reversal in
trend.
 Bollinger Bands are never to be studied in isolation,
instead to be studied along with other indicators.

4 WEEK RULE


4 Week Rule:
 It is used primarily for derivatives and
commodity markets.
 Cover Short positions and Buy long whenever
Prices exceed the highs of the 4 preceding
Calendar weeks.
 Liquidate Long Positions and sell short
whenever the Prices fall below the 4 preceding
Calendar weeks.
 According to this rule, the trader is always in the
market either Long or Short.

4 Week Rule:
 The above tool can be used without the aid of the
computer.
 It doesn’t catch the market tops or bottoms.
 Weekly breakouts can be used as confirming
signals for other technical indicators.
(In particular for Moving averages)
 The time period employed can be expanded or
contracted based on the sensitivity and risk
management levels.
 1week or 2weeks low can be used as stop losses
to exit previous longs.

OSCILLATORS


Oscillators:
 They are extremely useful in trend less markets
where other tools don’t work.
 It helps the trader in recognizing the overbought
or over sold situation.
 It also helps the trader in understanding the trend
which is loosing momentum i.e. trend nearing
completion by displaying certain divergence.
 Oscillator is only a secondary indicator which
may be a subordinate to basic trend analysis.
 Oscillators are extremely useful towards the end
of a market move rather than at the beginning.

General Rules for Oscillators Interpretation:
 Oscillators generally trade within a horizontal range or
band and few oscillators also has a midpoint value, that
divides the horizontal range into 2 equal half's.
 When oscillators reach an extreme range either on the
upper side or the lower side of the band, this suggests
that the current price move has gone too far and is due
for a correction.
 The trader should buy when the Oscillator line is in the
lower end of the band and selling in the Upper end.
 The crossing of the midpoint line is often used to
generate buy and sell signals.


Oscillators Use:
 Oscillator is most useful when its value reaches
an extreme reading on either side of the range.
 The market is said to be overbought when it is
near the upper extreme and over sold when it is
near the lower extreme.
 A divergence between the Oscillator and the Price
when the Oscillator is in an extreme position is
very significant.
 The crossing of the midpoint line can give
important trading signals in the direction of the
Price trend.

Oscillators and Momentum:
 The study of momentum is the basic study done
in Oscillator analysis.
 Momentum measures the VELOCITY of Price
change as opposed to actual price change.
 Market momentum is measured by continually
taking the price differences for a fixed period of
time. (10days)
 M = V – Vx; where V is the latest closing price and

Vx is the closing price x days ago.


Oscillators:
 If the latest closing price is greater than that of
10days ago, a positive value above the Zero mark
is plotted and vice-versa.
 A shorter period Oscillator is more sensitive to
that of a longer period one which is much
smoother.
 Momentum measures the acceleration or
deceleration in the current advance or decline in
the price trend.
 The Momentum line leads the price action and
gives an early signal for change in trend.

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.

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)


COMMODITY CHANNEL INDEX:
 CCI technique was developed by DONALD
LAMBERT.
 While constructing CCI, current price is
compared with a moving average of selected
time period. (Usually 5,10,20 and 40days)
 While CCI was originally developed for
Commodity trading, it is now a days popularly
used for stocks.
 CCI is a simple tool which indicates over bought
or over sold market.

COMMODITY CHANNEL INDEX:
 CCI is used as a timing tool which is best applied
to securities that have cyclical movements.
 CCI does not determine the length of the cycle,
whereas it used to determine when the cycle
begins or ends.
 Reading over +100 is considered to be Over
bought market and below -100 are considered to
be Over sold market.
 Study of divergence signal is also popular in
CCI.

RELATIVE
STRENGTH
INDEX

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. @ B.V.RUDRAMURTHY 146

 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.

 FAILURE SWINGS:
A Top failure swing occurs when the RSindex rises
above 70, declines to a lower level (fail point), raises
again from that level attempting to break the
previous high, but falls below the fall point, it is a
Bearish sign.

A Bottom failure swing occurs when the RSindex
falls below 30, recovers and again falls attempting to
break the previous low, but fails and breaks the Fall
point, it is a Bullish sign.

Negative Divergence:


Over Bought and Over Sold Situation:


Top Failure Swing:


Bottom Failure Swing:


STOCHASTICS


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)


STOCHASTICS:

 %K = 100[(C – Lx) / (Hx – Lx)]
where:
C = Latest closing price.
Lx= Lowest close for the last “X” days.
Hx= Highest close for the last “X” days.
 The above formula measures the % of closing price in
relation to the total price range for the selected time
period.
 %D is the 3 period moving average of the %K line. (FS)
 3 period moving average of %D gives Slow

Stochastics

STOCHASTICS:
 Most traders use Slow Stochastic to avoid too
much noise and to have a smooth curve.
 K line is the faster line and D line is the slower
line.
 20% and 80% are considered to be the bands of
Over bought and Over sold areas (Dline).
 Buy when the %K line rises above the %D line
and sell when the %K line falls below the %D
line.
 Crossovers above the upper band (80) and below
the lower band (20) are more powerful than
within the band. @ B.V.RUDRAMURTHY 156

STOCHASTICS:
 Failure swing applied in RSI can also be applied for
interpreting Stochastic.
 Negative Divergence between Stochastics and Price
can also be interpreted as done in case of RSI.
 Weekly Stochastics is used to forecast the market
direction and daily Stochastics can be used for
timing the market.
 Stochastics are also popularly used on intra day
charts for effective day trading.
 RSI and Stochastics both confirming a particular
signal is very strong.

Negative Divergence:


MOVING AVERAGE
CONVERGENCE AND
DIVERGENCE
(MACD)


MACD:
 MACD was developed by Gerald Appel.
 It combines Oscillator technique with that of
Dual Moving average cross over approach.
 The faster line called the MACD line is the
difference between the 2 exponentially
smoothed moving average of the closing prices
(Usually 12 and 26 days).
 The slower line called the Signal line is usually a
9 period exponentially smoothed average of
MACD line.
 (12-26-9) @ B.V.RUDRAMURTHY 161

MACD:
 The crossing over of the faster MACD line above
the slower signal line is a BUY SIGNAL.
 A crossing over of the faster line below the
slower line is a SELL SIGNAL.
 MACD line resembles an OSCILLATOR by
fluctuating between above and below zero line.
 An overbought situation exists when the lines
are too far above the zero line and over sold
situation when the lines are too far below the
zero line.

ACCUMULATION
-
DISTRIBUTION


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.


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.

 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.


AVERAGE
TRUE RANGE


AVERAGE TRUE RANGE:
 It is a measure of Volatility introduced by Welles
Welder.
 The True Range indicator is the greatest of the
following:
a) The distance between today’s high and today’s
low.
b) The distance between Yesterday’s close to
today’s high.
c) The distance between Yesterday’s close to today’s
low.
 The Average True Range is the 14 day moving

average of the true ranges.

AVERAGE TRUE RANGE:
 High ATR values suggests market bottoms
following a Panic selling. (BULLISH)
 Low ATR values suggests long sideways period
and signals of market topping.
 As prices bottom, Volatility is very high.
 Low Volatility generally accompanies
consolidation phase before the prices break out.


Topping of ATR suggesting market bottoming


WILLIAMS % “R”


WILLIAMS %”R”:
 It is a Momentum indicator introduced by Larry
Williams.
 %R = {Highest high in n periods – Latest close} * - 100
{Highest high in n periods – Lowest low in n periods}
 The interpretation of Williams %R is very similar to
that of a Stochastic.
 Reading over 80 or below 20 indicate the market
extremes of overbought or oversold situations.
 It is wise to sell after price starts turning down, rather
than simply selling because it is overbought. %R may
remain at overbought situations for an extended
period when price still continues its upward move.

WILLIAMS %”R”:
 %R is a strong leading indicator which forms a peak
and turns down a few day before the security price
peaks and turns down.
 Similarly %R usually creates a bottom and turns up
few days before the security price turns up.
 William %R popularly uses 14 days time period.
 5-10-20-28-56 are also popularly used as variations to
14 days time period.


WILLIAMS
ACCUMULATION AND
DISTRIBUTION


WILLIAMS ACCUMULATION-DISTRIBUTION:
 Accumulation indicates market controlled by buyers
and Distribution indicates markets controlled by
sellers.
 How to Calculate?
STEP-1:
Determine “True Range High” and “True Range Low” i.e.
“TRH” and “TRL”.
TRH = Yesterday’s close or today’s high which
ever is Greater.
TRL = Yesterday’s close or today’s low which ever

is Lower.

STEP-2:
1) If today’s close is greater than yesterday’s close:
Today’s W A/D = Today’s close – TRL.
2) If today’s close is less than yesterday’s close:
Today’s W A/D = Today’s close – TRH.
3) If today’s close is equal to yesterday’s close:
Today’s W A/D = 0
THE WILLIAMS ACCUMULATION-DISTRIBUTION IS THE
CUMULATIVE TOTAL OF THESE VALUES i.e. today’s
A/D + (1) OR – (2) OR 0 (3) Yesterday’s cumulative A/D.

 Distribution of security is indicated by
security making a new high and the William
A/D indicator failing to make a new high.
{Bearish Signal} (Top Failure Swing)
 Accumulation of security is indicated by
security making a new low and the William
A/D indicator failing to make a new low.
{Bullish Signal} (Bottom Failure Swing)


Bearish Signal


CHAIKIN OSCILLATOR


CHAIKIN OSCILLATOR:
 Inspired by the works of Joe Granville on OBV and
Williams on Accumulation and Distribution,
Marc Chaikin developed a moving average oscillator.
 The Chaikin Oscillator is created by subtracting a 10
period exponential moving average of the
Accumulation – Distribution line from a 3 period
exponential moving average of the accumulation –
distribution line.
 If a stock closes above its midpoint (high + close) / 2
for the day, then there was an accumulation on that
particular day and if stock closes below its midpoint
for the day, there was a distribution for that particular
day.

CHAIKIN OSCILLATOR:
 Volume is considered as the fuel which powers a
healthy rally. Thus accumulation should be supported
by heavy volumes and distribution by low volumes in
an uptrend and vice-versa.
 A Bearish divergence occurs when Prices move to
newer highs and the oscillator flattens or declines.
 A Bullish divergence occurs when Prices decline and
creates a newer low and the oscillator flattens or
moves higher.


Bullish Divergence:


ELLIOTT THEORY


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:
f) Pattern.
g)Ratio.
h)Time.

ELLIOTT THEORY:
 Patterns represents the Wave Formation that
comprises the most important element of the theory.
 Ratios determine the Retracement Points and the
Price Objectives by measuring the relationship
between different waves.
 Time relationships even though considered less
significant are used to confirm the Patterns and
Ratios.
 In its most basic form, the theory says that the stock
market follows a repetitive rhythm of a 5 Wave
advance followed by a 3 Wave decline.
 One complete cycle has 8 Waves of which 5 are
advancing and 3 declining.

ELLIOTT THEORY:
 Waves 1, 3 and 5 are called Rising or Impulsive Waves
and Waves 2 and 4 are called Declining Waves.
 After the 5 Wave advance, the 3 Wave Correction
begins. (represented by a, b, c)
 The Basic Pattern:
0-1 is called Wave 1, (Impulsive Wave)
1-2 is called Wave 2, (Declining Wave)
3-4 is called Wave 4, (Declining Wave)
5-a is Wave a, a-b is Wave b, and b-c is Wave c.

THE BASIC PATTERN:

5

b

3

1 a

4 c

2

0 @ B.V.RUDRAMURTHY 190

ELLIOTT THEORY:
 Each larger Wave can be further sub-divided into smaller
waves which follows the Fibonacci series.
 The Fibonacci series 1,2,3,5,8,13,21,34,55,89,144,…..
 Whether a given wave is divided into 5 or 3 is determined
by the direction of the next larger wave.
 Declining Waves moving against the trend (2 and 4) are
subdivided only into 3 waves whereas the corrective waves
a and c are subdivided into 5 waves.
 Corrective waves (a) and (C) are moving in the same
direction as the next larger wave 2, and hence are
breakdown into 5 waves, whereas Wave (b) by comparison
has only 3 waves since it is moving against the next larger
wave 2.

ELLIOTT THEORY:
 It is of great importance to determine the difference
between groups of 3 and 5 waves, in application of
Elliott Theory to forecast the future.
 A completed 5 wave move is only a completion of one
of the parts of larger wave and there is more upside
left unless it is 5th of 5th larger wave.
 A Correction can never take place in 5 Waves, it is
always of 3 Waves.
 In a Bull Market if a 5 wave decline is seen, it may
probably be the 1st wave of the 3 Wave (a,b,c) decline
and there may be more declines to come in future.
 In a Bear Market a 3 wave advance should be followed
by resumption of a downtrend.

ELLIOTT THEORY:
 Corrective Waves are less clearly defined and are very
difficult to identify / predict.
 Corrective Waves are always of 3 Waves and it can
never take place in 5 Waves. (With an exception of
Triangle)
 Corrective Waves are classified into 3types:
1. Zig-Zags.
2. Flats.
3. Triangles.


ELLIOTT THEORY:
ZIG ZAGS:
 A Zig Zag is a 3 Wave Corrective Pattern against the
major trend which breaks down into a 5-3-5 sequence.
 Middle Wave B, falls short of the beginning of Wave A
and Wave C moves well beyond the end of Wave A.
 Bull Market Zig Zag (5-3-5)


ELLIOTT THEORY:
ZIG ZAGS:
 Bear Market Zig Zag (5-3-5)


ELLIOTT THEORY:
ZIG ZAGS:
 Double Zig Zag (5-3-5 (3) 5-3-5)
It is a less common variation of Zig Zag which sometime
Occur in big corrective patterns. It is nothing but 2 Zig
Zag pattern (5-3-5) connected by an intervening a-b-c
Pattern.


ELLIOTT THEORY:
FLATS:
 A Flat Pattern follows a 3-3-5 Pattern. Wave a is a 3
pattern wave unlike 5 incase of Zig-Zag.
 Flat is more of a consolidation phase rather than
correction phase. It is a sign of strength in a Bull
Market.
BULL MARKET FLAT: (3-3-5) Normal Correction.


ELLIOTT THEORY:
FLATS:
BEAR MARKET FLAT: (3-3-5) Normal Correction.


ELLIOTT THEORY:
TRIANGLES: (3-3-3-3-3)
 Triangles usually occur in the fourth wave and
precede the final move in the direction of the major
trend.
 They can also appear in wave “b” in a,b,c correction.
 Triangles are both Bullish and Bearish in an uptrend
since they indicate resumption of an uptrend and also
indicate that after an another wave up, prices will
correct.
 Corrective waves in case of a triangle may be of 5
waves, unlike Zig-Zag and Flats which are of 3 waves.

ELLIOTT THEORY:
TRIANGLES:
 Triangles are usually continuation pattern that break
downs into patterns of 5 waves, each wave having 3 waves
of its own.
 According to Elliot, there are 4 types of triangles namely:
a) Ascending Triangles.
b) Descending Triangles.
c) Symmetric Triangles.
d) Expanding Triangles. (Broadening Pattern)
 Price Objective incase of triangles is measured based on
the height of the triangle formed from the base.

ELLIOTT THEORY:
 The rule of Channel lines studied earlier helps in
identifying the wave counts at the point of breach of
channel line.
 Wave 4 in a previous bull market shall be considered
as the strong support area in subsequent bear
markets.
 After the end of Bull market with 5 up waves and
beginning of Bear market, the markets generally will
not move below the 4th wave of the previous up move.
It helps to identify the bottom of the bear market.


ELLIOTT THEORY:
Fibonacci Numbers for Ratio’s:
 The following series of Fibonacci numbers
1,2,3,5,8,13,21,34,55,89,144…… as the following
salient features:
a) The sum of any 2 consecutive numbers equals the
next highest number.
b) The ratio of any number to its next higher number
approximates to 0.618.
c) The ratio of any number to its next lowest number
approximates to 1.618.
d) The ratio of alternate number approaches to 2.618 or
its inverse 0.382.

 One of the Impulsive waves sometimes extend and the
other two waves are equal in magnitude and time. i.e.
if wave 5 extends, wave 1 and 3 should be about equal
and if wave 3 extends, wave 1 and 5 should be about
equal.
 A Minimum target for top of Wave 3 can be obtained
by multiplying the length of wave 1 by 1.618 to the
bottom of Wave 2.
 The Top of Wave 5 can be approximated by
multiplying Wave 1 by 3.236 (2 * 1.618) and adding that
value to the top or bottom of wave 1 to obtain
maximum and minimum targets.

 Where Wave 1 and 3 are of about equal, and Wave 5 is
expected to extend, Price Objective for Wave 5 is the
distance between the bottom of wave 1 to top of wave 3,
multiplied by 1.618 from bottom of wave 4.
 For Corrective Waves, in a normal 5-3-5 Zig-Zag correction,
Wave C is often about equal to the length of Wave A or
multiply 0.618 by the length of Wave A and subtract that
result from bottom of Wave A to get the possible length of
wave C.
 Incase of flat 3-3-5 correction, where Wave B reaches or
exceeds the top of Wave A, Wave C will be about 1.618 the
length of Wave A.
 In a symmetric triangle, each Wave is to its previous wave
by about 0.618. @ B.V.RUDRAMURTHY 206

Fibonacci Percentage Retracements:
 The most commonly used percentage
retracements are 61.8%, 38% and 50%.
 In a strong trend, a minimum retracement is
usually around 38% and in a weak trend, the
maximum retracement is around 62%.
(Retracements are measured from bottom of an
uptrend to the top of an uptrend and vice-versa)


Fibonacci Time Targets:
 It is considered to be least important of the three being Price,
Ratios and time.
 It is very difficult to predict and since it is least important, many
followers of Elliot ignore it.
 Fibonacci time targets are found by counting forward from
significant tops or bottoms.
 Trader counts from the top or bottom the number of trading
days for future top or bottom to occur on Fibonacci days i.e.
13,21,34,55 or 89th trading day.
 The above time targets are used on all types of charts namely
Daily, Weekly and monthly charts.
 Fibonacci time targets can be taken from top to top, top to
bottom, bottom to top and bottom to bottom. But however the
above targets can be foundB.V.RUDRAMURTHY the fact.
@
only after 208

Elliot Wave Summary:
 A complete Bull Market cycle is made up of 8 Waves, 5 Up
Waves followed by 3 Down Waves.
 Waves can be expanded into longer waves and sub-divided
into shorter waves.
 Correction always takes place in 3 Waves.
 The 2 types of Corrections are Zig-Zag (5-3-5) and Flats
(3-3-5).
 Triangles are usually 4th Wave or Wave B.
 Sometimes one of the impulsive waves extend and the other
two will be of time and magnitude.
 The number of Waves follow the Fibonacci sequence.
 Fibonacci ratios and retracements are used to find out Price
Objectives.

Elliot Wave Summary:
 The most common retracements are 38%, 50% and 62%.
 Bear markets should not fall below the bottom of the
previous 4th Wave.
 The theory was originally applied to Stock Market
averages and does not work as well incase of individual
stocks.
 Elliot works very well in case of those markets which are
highly liquid and followed by large number of investors
and traders.
 Elliot theory should be used in conjunction with other
technical indicators and not against them.


CANDLE STICKS


BAR CHARTS VS CANDLE STICKS
 Candle charts pictorially displays the Supply and
Demand function by showing who is winning the
battle between Bulls and Bears.
 Candle Sticks not only reveal the trend but also
the force or lack of force behind the trend.
 Candle Stick charts indicate early signals of
reversal in comparison to that of Bar Charts.
 It can be used on all markets and all assets with
Open, High, Close and Low data.


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.


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”.


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”

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.


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.


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.


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).


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.


SIGNALS
 EXAMPLE OF A CANDLE
 A Long White 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.


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.


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”.

MARKET STRATEGIES


MARKET STRATEGIES
 Trend change or Reversal signal
represents the transformation in market
psychology and an investor should trade
accordingly.
 As the popular saying, ”TREND IS YOUR
FRIEND AND ALWAYS GO ALONG WITH
IT’.
 On Charts, Western trend reversal patterns
include Double tops/bottoms, Triple
tops/bottoms, Head and Shoulder, Island
tops and bottoms, Cup and Saucers etc.

MARKET STRATEGIES
 A Reversal signal should be used to
initiate a new position only if that signal
is in the direction of the major trend.
 Consider a Stock moving in a strong
uptrend, and then it either consolidates
sideways or moves downwards to
retracement levels, and at this time if a
BULLISH CANDLE signal appears, fresh
Long Positions can be initiated.


MARKET STRATEGIES
 A Bullish Candle signal in a bear trend
should be used to either cover short or
as an alert that the markets may rally
and to use that rally to sell since the
major trend is down.
 A trend reversal signal may indicate
continuation of the previous trend or
reversal of the previous trend.


TREND REVERSALS
 In figure 1, trend resumes after
retracement, whereas in figure 2, trend
breaks down.

FIGURE 1 FIGURE 2


SUPPORTS AND RESISTANCES
 Identification of Support and Resistance
levels are very important.
 It may be a Prior high or low, trend line,
Moving average or most recent high or
low.
 If a Bullish Candle appears at the
Support, it increases the potential of the
uptrend to resume, whereas a Bearish
candle at the Resistance increases the
potential for the downtrend to begin.

SUPPORTS AND RESISTANCES
 The Previous Supports may now act as
New Resistances and Previous
Resistance now as New Support.
 A break of Support or Resistance on a
Closing Basis is considered more
important than on an Intra day basis.
 A sideways trend in Japanese
terminology is called as BOX Range.
Close of real body above or below the
range is of vital importance.

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 TOPS:


 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.

 HIGH WAVE CANDLES:


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.



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.



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.


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.

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).


HAMMER, HANGING MAN AND
SHOOTING STAR


EASY INTERPRETATION
 “FEEL BULLISH WITH A
HAMMER AFTER A FALLING
MARKET AND BEARISH
AFTER A RISING MARKET”.


THE DANGEROUS DOJI
 The DOJI is a session in which the
Opening and Closing prices are the
same. It resembles a Cross.
 Like a Spinning Top, Doji indicate a
market in complete balance between
Supply and Demand.
 Doji represents market at a juncture of
indecision and it can be an early
warning that the preceding rally is losing
steam.

THE DANGEROUS DOJI
 Doji’s are extremely powerful in calling
market tops, (especially after a long
white candle) but however sometimes
lose signal in calling the market
bottoms.
 A close over the Doji’s high is a signal
that bulls have regained strength.
 The Doji’s are more powerful when they
occur rarely compare to its past history
on a particular chart.

THE DANGEROUS DOJI
 The Doji’s are named based on the placement
of open and close prices of the session.
 THE DRAGON FLY DOJI:
It forms with the Open and Close near or at the
high’s of the candle. This candle signal’s
bullish implications. It resembles a Hammer
without a real body.
Doji’s are generally not important at the
declines, but however Dragon Fly is an
exception. In a oversold market, Dragon fly
Doji is a bullish signal.


THE DANGEROUS DOJI
 THE GRAVE STONE DOJI:
It is the bearish counter part to the Dragon fly
Doji. The Grave Stone Doji’s Open, Close and
low resides at the bottom of the candle.
Grave Stone Doji’s are extremely powerful in
calling top reversals. If a Grave stone Doji
appears on a market top and the next candle
falls to the downside, it confirms the earlier
Doji’s Signal of market topping.


THE DANGEROUS DOJI
 Doji’s with longer upper and lower
shadows are called as Long Legged Doji’s.
 A Doji appearing on a rally is called as
Northern Doji and that on a decline is called
Southern Doji.
 Doji’s give better signal when taken in the
context of a prior trend, when they confirm
other technical indicators or patterns and
during consideration of follow through
action.

TYPES OF DOJI’S


LONG REAL BODIES
 These Long Real Bodies are called as
“Belt Holds”.
 They are very important at points of
Support and Resistance levels.
 Larger the size of the real body, more
important are the signals generated by
it.
 Unlike Doji’s, Colour of Candles are very
important in case of Long Real Bodies.

BELT HOLDS
 BULLISH BELT HOLD:
It is a tall Green candle that opens on
or near the lows of the day and closes
at or near the highs of the day.
A Bullish belt hold appearing in a
decline forecasts a potential rally and
at the ascent confirms the intactness
of the Bull trend.


BELT HOLDS
BEARISH BELT HOLD:

It is a Long Red Candle that Opens at
or near the high’s of the day and then
falls down towards the lows of the day
and closes at or near the low’s of the
day.
Appearance of Bearish Belt Hold at the
end of an uptrend signifies TOP
REVERSAL.


BELT HOLDS
 Belt holds appearing near the Support
or Resistance areas confirm the
strength of those areas and are more
significant for a reversal to take place.
 Belt hold lines increases the chances
of a reversal signal when they have
not appeared regularly on the chart in
recent time.


BELT HOLDS
 When a Long Position is to be closed?
A Stock in an uptrend shows sign of
tiredness and reversal, when a Doji or a
Spinning top occurs and it is then
confirmed by a Bearish Belt Hold.
 When a Short Position is to be closed?
A Stock in an Downtrend shows sign of
tiredness and reversal, when a Hammer
occurs and it is then confirmed by a Bullish
Belt Hold.


BELT HOLDS
 While analysing Candles, one should
consider both Real body as well as
Shadows projected by them.
 A tall Green candle that also has a
long upper shadow offsets some of its
Bullish implications and similarly a
tall Red candle that also has a long
lower shadow offsets some of its
Bearish implications.

BELT HOLDS
 A market stabilizing at its Support and
many shadows develop with definable
long lower Bullish shadows (despite
the size of real body), indicate that
Buyers are accumulating each time
the price comes down to that support
levels.
 Long positions can be initiated if the
resistance levels are breached with
heavy volumes.

CANDLE PATTERNS
 BULLISH PIERCING PATTERN:
It appears in the context of a down trend
and is more important in an oversold
market.
A Bullish Piercing pattern consists of a red
candle formed in a down trend and the next
candle’s real body should be a green one
which closes more than one half of the
prior red body.
Subsequent price action should confirm
the above piercing pattern.


CANDLE PATTERNS
 DARK CLOUD COVER:
It forms a top reversal pattern where the
previous session is a strong green candle and
the next session opens over the previous
sessions high or close and end near the lows of
the that session without leaving much of a lower
shadow.
It should ideally close below the half way of
prior green candle.
A Dark Cloud on a security formed at its
resistance area, backed up with a steep uptrend
is a good place to short. If the above pattern is
supported by Volumes, it is a better
confirmation. The high’s of the dark cloud can
be kept as Stop Loss.

CANDLE PATTERNS
 DARK CLOUD COVER:
It forms a top reversal pattern where the
previous session is a strong green candle
and the next session opens over the
previous sessions high or close and end
near the lows of the that session without
leaving much of a lower shadow.
It should ideally close below the half way of
prior green candle.


Technical Analysis Rudramurthy

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