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Technical analysis is a security analysis technique that claims the ability to forecast the future direction of prices through the study of past market data, primarily price and volume.

In its purest form, technical analysis considers only the actual price and volume behavior of the market or instrument.

Technical analysis mainly seeks to predict the short term price travels. 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.

The basic assumptions of technical analysis are:

➢ The market discounts everything: technical analysis assumes that, at any given time, a stock's price reflects everything that has or could affect the company - including fundamental factors. This only leaves the analysis of price movement for a particular stock in the market.

➢ Price moves in trends: In technical analysis, price movements are believed to follow trends.

This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption.

➢ History tends repeats itself: Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical analysis uses chart patterns to analyze market movements and understand trends.

5.1. Price Charts

A chart is simply a graphical representation of a series of prices over a set time frame.

Technical analysis uses various kinds of charts to show the movement of prices over a period of time. The charts that are most commonly used for technical analysis are:

➢ Line Charts

➢ Bar Charts and

➢ Candlestick Charts Line Chart:

Line Chart is the most common and simple charts as it considers only the closing prices of the stocks and ignores other values such as open, close, etc. The line chart is drawn by connecting the closing prices of a stock over a period of time. The above figure shows the line chart for the Reliance Industries Limited for 3 months period (April to June 2010) Bar Chart:

The chart is made up of a series of vertical lines and two small horizontal lines, one to the left and another to the right. The vertical line represents the high and low for the trading

period, along with the small horizontal line on the left to show the open price and another on the right side to show the closing price. The above figure shows the bar chart for Reliance Industries Limited for 3 months period (April- June 2010).

Candlestick Chart:

Similar to a bar chart the candlestick chart also shows all the information like high, low, open and close prices of the stock the only difference being the way it is visually constructed.

Usually traders feel that candlestick charts are easy to read because it clearly shows the relationship between the opening and closing prices of a security. If the closing price is more than the opening price the candle is shaded white. Conversely the candle is shaded black if the closing price is less than the opening price.

The above figure shows the Candlestick price chart of Reliance Industries Limited for a period of 3 months (April- June 2010) and also the patterns of candle sticks.

1.2. Volume:

Volume refers to the number of shares or contracts that are traded over a given period of time. Usually a price chart is presented along with the volume which is represented by volume bars. The higher the volume, the more active the security is. Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns.

Any price movement up or down with relatively higher volume is seen as stronger and more relevant move than a similar move with weak volume.

1.3. Trends:

Trend refers to the direction in which a security or the market is moving. In technical analysis, it is the movement of the highs and lows that constitutes a trend.

Trends are generally classified into:

➢ Uptrend:

A trend is considered to be uptrend if each successive high and low is more than the high and low of the previous day. This is also called as bullish trend. In other words in an uptrend the prices makes a series of higher highs and higher lows.

➢ Downtrend:

A trend is said to be downward if each successive high and low is lesser than that of the previous day. Downward trend is also called as Bearish Trend. In other words in a downtrend prices makes a series of lower highs and lower lows.

➢ Sideways/ Horizontal Trend: A trend is considered to be sideways if there is small changes in the highs and lows

.

To clearly show a trend a line is drawn in the price chart. This line is called as a trendline. An upward trendline is drawn at the lows of an uptrend. A downward trendline is drawn at the highs of a downtrend.

1.2.

Support and Resistance Levels:

Support: Support refers to the price level beyond which the prices will not fall. It is the level at which buyers take control over the markets and prevents the price from falling further. In the above figure we can see that the support level is established at Rs.30.30

Resistance: Resistance refers to the price level beyond which the prices will not go up. It is the levels at which the sellers will take control over the market and prevents the price from rising further. In the above figure we can see that the resistance is established at Rs.31.90.

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. In the above figure we can see that the Support at Rs.51 has become the resistance level on a later stage.

1.3. Technical indicators:

Technical indicators are mathematical formulas that, when applied to security prices, clearly flash either buy or sell signals. Price data includes any combination of the open, high, low or close over a period of time and most of the indicators use only the closing prices.

For analysis purposes, technical indicators are usually shown in a graphical form above or below a security's price chart. Once shown in graphical form, an indicator can then be compared with the corresponding price chart of the security. Sometimes indicators are plotted on top of the price plot for a more direct comparison.

A technical indicator offers a different perspective from which to analyze the price action.

Some, such as moving averages, are derived from simple formulas and are relatively easy to understand while some such as MACD uses complex formulas and are difficult to understand.

Technical indicators offer many uses such as:

➢ To confirm the trends

➢ To generate Buy/Sell Signals

➢ To predict the direction of future prices.

The technical indicators can be broadly classified into leading indicators and lagging indicators. The leading indicators are those indicators which are designed to lead price movements. The most common leading indicators are RSI and ROC.

Lagging indicators are those indicators which follow price action and are commonly referred to as trend following indicators. Some of the most common lagging indicators are Moving Averages and MACD.

Some of the most common technical indicators that are used in this project are: