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TECHNICAL ANALYSIS

Tags: market
Importance of Timing in Investment
While fundamental analysis and security evaluation explain why share prices fluctuate, how they are determined and what to buy or sell, the technical analysis will help the decision when to buy and sell. The traditional theory of capital Market efficiency postulates that entry into the market at any time would lead to the same average return as that of the market.

But in the real world of imperfections, there are investors who have burnt ehri fingers by entering the market at te wrong time. Investment timing is, therefore, crucial as the market is continuously jolted by waves of buying and selling and prices are moving in trends and cycles and are never stable. The Stock market is different from other markets, as there is a continuous buying and selling and bid and offer rates as under a system of auctions. The resultant prices, led by the sheer force of the market, may fluctuate either way ad may exhibit waves or trends. Entry and exit in the market will, therefore, make all the differece to the spread between buying and selling prices and the profits or losses. Timing of investment is, therefore, of vital importance for trading in the stock market.

Basic Tenets of Technical Analysis
Technical analysis of the market is based on some basic tenets, namely, that all fundamental factors are discounted by the market and are reflected in prices. Secondly, these prices move in trends or waves which can be both upward or downward depending on the sentiment, psychology and emotions of operators or traders. Thirdly, the present trends are influenced by the past trends and the projection of future trends is possible by an analysis of past price trends. Analysis of historical trends confirmed the above principles asnd the Random Walk theory explaining the randomness of price
changes has been found to be not applicable by the technical analysis in practice.

Tools of Technical Analysis

1. Daily Fluctuation or Volatility
Open, High, Low and Close are quoted. Changes between Open and Close or High and Low can be taken in absolute points or in percentages to reflect the daily volatility. Such fluctuation can be worked out on weekly, monthly or yearly basis also to reflect the general volatility of the market. The use of this indicator is to caution the investor against high volatility in any scrip. But a stable uptrend or downtrend can be discerned from these changes for the investor to interpret the market.
A Bar chart as given below can be used to depict the daily variatons :
High High High
Close Open Close
Close Open
Low/Open Low Low
An yearly High-Low indicates the possible levels within a range that the price may move which helps to locate entry and exit points.

2. Floating Stock and Volume of Trade
Floating stock is the total number of shares available for trading with the public and volume of trade is any part of that floating stock. The higher this proportion, the higher is the liquidity of a share which is to be purchased or sold. Volume trends are also a supporting indicator to the price trends to interpret the market.

3. Price Trends and Volume Trends
The Chartist method and Moving average method can be used to depict these trends.

4. Rate of Change of prices and Volumes or the ROC Method

This is useful like the moving average method to idicate more clearly the buy and sell signals. The Chartist method is useful to indicate the directions and the trend reversals. ROC is calculated by dividing the today’s price by the price five days back or few days back. It can be expressed as percentage or positive or negative change. Thus they can be moving around 100, in the case of percentages or zero line, in the case of positive and negative percentage changes.

5. Japanese Candlestick Method
There are three main types of Candlesticks with each day’s trade being shown in the form of candlesticks. Each stick has the body of the candle and a shadow. The body shows the open and close prices while the shadow shows the high and low prices. the three main types are as follows:

a. Closing price is higher than open price (White candlestick).
b. Closing price is lower than the open price (Black stick).
c. Open and Close are at the same level (Doji candlestick). This method will indicate any likely changes in trends in the short-run.

6. Dow Theory
There are three major trends in this theory. Minor, intermediate and major trends representing daily or weekly, monthly and yearly trends in prices respectively comparing the price trends to waves, tides and ripples.

7. Elliot Wave Theory
The market is unfolded by a basic rhythm or pattern of 5 waves up to be corrected by three waves down with a total of 8 waves - a phiolosophy of price trends.

8. Theory of Gaps
Gaps in price between any two days causing a discontinuity are called a gap. The high of one day may be lower than the low of the previous day when prices are falling. Gaps indicate the likely acceleration of the trend or reversal.
Gaps are of different categories, namely :

a. Common gaps - When prices move in a narrow range, a gap can occur in prices.
b. Break out gaps - When price trend is likely to change, a gap can occur in either direction. This gives a break to congestion in any direction.
c. Runaway gaps - These gaps occur continuously in a downward phase or an upward phase, accelerating or Decelerating the trends.
d. Exhaustion gaps - These occur when the rally is getting exhausted. When the runaway gap is coming to an end, there can be exhaustion gap to indicate the likely completion of the uptrend.

9. Advance Decline Line or Spread of the Market: The ratio between Advances to declines will indicate the relative strength of upward or downward phase. When the advances are increasing over declines it is an upward phase and the reverse indicates the down ward phase.

10. Relative Strength Index (RSI) of Wells Wilder : It is an oscillator used to identify the inherent strength or weakness of particular scrip. R.S.I. is calcualted for one scrip while RSC or the relative strength comparative, is the ratio of two prices of two different scrips, used for comparison of two or more scrips. RSI can be calcualted for any number of days say 5 or 10 etc. to indicate the strength of price trend.

Dow Theory
The Dow Theory postulates that prices of industrial securities tend to move in tune with business cycles of the boom, depression etc. in the economy. As the corporate performance depends on the industrial growth and the tone of the economy, prices of shares should broadly reflect the overall trends in the economy, which indeveloped countries are dependent on the business cycles and business expectation. If the business conditions are good, demand increasing, industrial performance will be good and the corporate share prices will be on the upswing. The reverse is true in time of recession and depression in the economy. The trends in the economy are reflected in the market average prices of shares. All fundamental factors are thus discounted by the market, and get reflected in average prices. It will thus be seen that factors affecting these supply and demand conditions in the market are summed up in the average prices in the market. A study of these average market prices is what is attempted in technical analysis and its trends are in the form of peaks, thoughts and cycles.

Major Trends
The trends in stock prices are divided under three heads - primary, secondary and minor. The primary trend is a long-term trend of a year or more reflectig the basic mood of the market showing upward or downward movement. The secondary or intermediate trend represents the correction to the primary trend and is of a short duration of a few weeks to a few months. The minor trends may be in either direction on a few weeks to a few months. The minor trends may be in either direction on a daily or weekly basis, but pointing to the underlying primary trend either upward or downward. These three trends are comparable to the tides, waves and ripples of the sea respectively. If the successive waves move further inland towards tbe beach than the preceding ones, then the tide would reflect the upward trend through higher peaks ad troughs. On the reverse side, if the tide is moving inwards into the sea then the trend is downwards and prices tend to decline on average. Each successive minor trend and intermediate trend result in a net downward movement and support the primary market trend in the downward direction. In the Dow Theory, the major trends, namely, bullish or bearish trends, have three phases. In the first phase of bullish trend, called the accumulation phase, only a select elite of investors who perceive the coming things first start buying shares. In the second phase, the followers of trend notice a distinct uptrend and begin to participate in the buying and then the mass buying starts. The third phase is the end of the uptrend when the first elite group who initiated the first phase should dislodge their shares for profit-taking. Then there will be a reversal of the trend. The fall in the prices in a bull phase is atechnical reaction and a rise in prices in a bear phase is a technical rally. The concentration in the hands of bull is called accumulation, which when sold off gets distributed and there will be a decline inprices.

So far as the volume of trade is concerned, it should expand in the direction of the major trend. During the uptrend period, the volume would expand when prices rise and decrease when prices decline. During the down-trend, there will be a reversal of the trend and the volume will expand when prices drop and contract when they start rising. The only problem which is a grey area in the Dow Theory is the signal for reversal of the trend. The first symptom of a change would call for “buy or sell” decision and those who perceive the change first would gain in speculation. As the primary trend continues, the gain from speculation decreases. The fact of the matter is that it is not easy, except for the expert eyes, to detect a change in direction int eh existing trend and the first leg of the new trend in the opposite direction. For knowing the reversal, point a lot of experience and expertise is necessary in this line. The reversal pattern is explained below. A, B, C are the successive peaks during the upswing, but M is a point of trough which is lower than the earlier troughts of D and E. The point S1 is the point of sell signal. This is called the failure swing diagram. In the non-failure swing diagram, E is below M but the peak C is still above peak B. So it is not certain whether the point S1, or S2 should be the sell signal. Whether the point of reversal has set in or not is not clear from the diagram. Such occasions arise in both upswing and downswing diagrams
Chartist Method As referred to earlier, technical analysis is a study of the market data in terms of factors affecting supply and demand schedules, namely, prices, volume of trading etc. A study of the historical trends of market behaviour shows the cycles and trends in prices which may repeat as the present is a reflection of the past and the future of the present. This is the basis for forecasting the future trends which are used for deciding on the basis of the buy or sell signals. For forecasting, analysts use charts and diagrams to depict the past trends and project the future. But these methods are rough and ready methods and there are no foolproof methods of forecasting the stock prices. The technical analyss only helps to improve the knowledge of the probabilities of price behaviour (upswing or downswing) and help the investment process. The technical analysis does not claim 100% chance of success in predicti ns that are made for investment. In view of the limitations inherent in the technical analysis, this analysis is generally juxtaposed with fundamental analysis of the market and the scrips. It was the past experience that the receipt of information and the actual price absorption of the information would not coincide and there is a time lag between them. As a result, the current price changes would give a clue to the subsequent price changes, if properly analysed and interpreted. In the market analysis, the variables to be taken into account are the breadth of the market, volume of trading etc. Market breadth is the dispersion of the general price rise or decline, which means daily cumulation of a net number of advancing or declining issues. Breadth analysis focuses on change rather than level in prices. Breadth of price changes in terms of the number of gainers or losers among the scrips is analysed to know the width of rise or fall in prices.


Breadth of the Market
The breadth of the market analysis is based on the nature of stock market cycles. Bull markets are viewed as long-drawn-out affairs, during which individual stocks reach peaks gradually with the number of individual peaks accelerating as the market averages rise to the turning point. Thus the turning point for a bull phase is at that point where a larger number of stocks are falling when the averages are still rising. In the bear market, there is a large number of stocks falling in a period of time. The end of the bear market is near when there is a selling climax and a large number of sellers rush to sell all at once. The breadth is measures by the number of scrips rising or falling to the total number. In a bull phase there will be a large number of net rises and in a bear phase, a large number of net falls. Normally, the breadth and the market average (BSE Index) lines move in tandem. In a bull phase, if the breadth line declines to successive new lows, while the market average is going up, it means that a larger number of scrips are declining although blue chips included in the BSE Index continue to rise, but the suggestion is that there is an approaching peak in the averages and a major downtrend is in the offing later.

Volume of Trading
The above trends of the breath of the market are to be examined along with the supporting data on volume of trading. Price trends follow the volume trends in general. Historical data analysis of price and volume movements indicate that in a normal market, the price rise is accompanised by an expanding volume. If the level of volume is declining more than in the previous rally in times of bullish trend, it warns of a potential trend reversal. Termination of a bearish phase is often accompanied by a selling climax. Following a decline in prices, a heavy volume of trade with little price change is indicative are to be studied carefully before a final decision is taken on the state of the market, whether bullish or bearish, the phase of the uptrend or downtrend and look for buy and sell signals at the start of the reversal trends. Both the price spread and volume trends are the result of demand and supply pressures. In the short-run, or on a day-today basis, the demand and supply for each scrip is base on a host of fundamental, technical and other factors. Trading in futures, options asnd arbitrage activitiy would distory the pure demand and supply analysis. The money flow analysis of the market general adopted by the analysts is also distorted by the dynamics of insider trading, short sales, “buying on weakness” and “selling on strength”, etc.

Tripod of Technical Analysis
1. Market prices are determined by a host of fundamental, technical and other factors their which are both rational and irrational. It is possible that the market prices may be overvalued or undervalued always.

2. Average market price discounts all developments and is a reflection of the sum total of all forces operating on the market.
3. History or past trends have a role in the shaping of the future and as such an analysis of the past helps the projection for the future.

The above tripod leads to a science of recording in a graphic form, the price trends. The actual history of trading on the stock market is recorded in terms of price changes, namely, oscillators, and the volume of transactions in any scrip together. Based on the past hevaviour, the future trends are predicted and investment suggestions are made based on such predictions of trend changes. The timing of an investment when to buy or sell is facilitated by a study of these charts and graphs. These are no doubt subjective factors based upon the behaviour and psychological aspects of human beings which influence the market. As opposed to fundamental factors, which are statistical, incorporating the financial and physical variables of corporate units asnd economy, the market is also influenced by the non-statistical information such as behaviour aspects, emotions, etc.; for the latter factors, technical analysis assumes importance in the investment strategy. In particular the decision to buy or sell is a fundamental decision, but the decision when to buy or sell is a decision arising out of technical analysis of the market.

Principles of Technical Analysis
The principles involved in technical analysis and in particular in the Dow Theory analysis, can be summarized as follows :
1. Principle of wave motion and trends leads to different types of price trends.
2. Action and reaction resulting from buying and selling pressures lead to corrections and rallies to the major uptrend’s and downtrends respectively.
3. Principle of congestion involving support and resistance lines results in a phase of activity, in which the market is
undecided, hesitant and the trend undermined. The prices move within a band of resistance and support lines, and
the trends involve up and down movements in a more or less horizontal path, until the prices are driven up or down.
In congestion, the continuous pressures of buyers are met equally. But when the buyers exceed the sellers, both in volume and value of deals, then the price emerges from the bottom of the range and there will be an up breakout. When the sellers predominate, there will be a down breakout in the price level, the resistance and support lines are broken in either case. When buyers are increasing purchases and the volue increases, then there is said to be accumulation. When sellers are increasing their sales and the volume rises, then there is said to be distribution. When buying exceeds selling and persists, then there is a breakout of prices from the congestion into a bull phase. On the other hand, when selling exceeds buying and continues to persist, the congestion is broken out into a bear phase.

Charts and Trend Lines
The use of charts for analysis of prices in technical analysis was reerred to. Fitting a trend line for price changes on a daily basis is the first step in the analysis of charts. These changes may be pointing upwards or downwards or stable over a horizontal one. The movements are such that there are both peaks and through in these price changes - peaks showing an upward trend troughts or reactions to the uptrend, viz., line joining the lowest points or troughs pointing up. If this line is pointing downwards, then it is a bearish phase (Fig. 28.4). If the movements are downwards generally, then there will be rallies moving up the prices. These upper peaks, if they are joined, give the trend line as much as the lowest through. The bull phase depicts the rising peaks successively, while the bear phase shows the falling peaks successively (Fig.) These support lines and resistance lines are clearly noticed when the prices are moving in a narrow band for some time. When the price pierces the resistance line, this is the first indication of the reversal of the trend in the upward direction. So also in a bull phase when the price line falls below the support line, a reversal of the trend is indicated. Various configurations of price movements like stable pattern, M and W patterns, head and shoulders etc. are formed. It is possible that various triangles, flags, pendants, etc. can be described by the price trends. The basic analysis involves the deciphering of the trend identifying of the reversal and fixing up of buy and sell signals in these price movements. The stable price pattern is ideal for genuine investors to enter the market.

Moving Averages
The analysis of the moving averages of the prices of scrips is another method in technical analysis. Generally, 7-day, 10-day and 15-day moving averages are worked out in respect of scrips studied and depicted on a graph along with similar moving averages of the market index like BSE Sensitive Index. There will then be two graphs to be compared and when the trends are similar, the scrip and BSE market index will show comparable average risks. The theory of moving averages also lays down the following guidelines for identifying the buy and sell signals. Whenever the moving average price line cuts the actual price line of the scrip of the market index from the bottom, it is a signal to sell shares. Conversely, when the moving average line cuts the actual price line from above, it is the right time to buy shares. Here the comparison can be made separately for the BSE market index moving average with its actual price index asnd the moving average price of any scrip with its actual price.

Advantages of Moving Averages
Since the price fluctuations are wide and frequent, reflecting the volatility of the market and the scrips, some amount of smoothing can be achieved by taking the moving averages of the prices. Generally, the closing prices of these scrips are taken for the moving averages. The usefulness of this will also depend on the number of days (7 days, 10 days, 20 days, etc.) for which these averages are worked out. These averages can be represented in a graphical form to help identification of buy and sell signals. The first indication is that when the actual scrip price crosses for short-term moving average line (or, say, 7 or 10 days). This is to be supported by other evidence of a reversal of the trend to justiry the buy signal. The short-term moving average of 7 or 10 days should cross the longer-term moving average of 15 or 20 days, which in turn should cross the further long-term moving averages (or, say, 60 or 120 days) to finally confirm the buy signal is to be given when the moving average line cuts the actual price line from above. It is cuts from below, then the signal is to sell. The signal of moving averages can also be confirmed by further analysis of other technical factors like the trend reversal shows in the chartgraphs referred to above.

Criticism of Dow Theory
The Dow Theory is subject to various limitations in actual practice. Dow has developed this theory to depict the general trend of the market but not with the intention of projecting the future trends or to diagnose the buy and sell signals in the market. These applications of the Dow Theory have come in the light of analytical studies of financial analysts. This theory is criticised on the ground that it is too subjective and based on historical interpretation; it is not infallible as it depends on the interpretative ability of the analyst. The results of this theory do not also give meaningful and conclusive evidence of any action to be taken in terms of buy and sell operations. Fig. Daily actual prices are dashed lines. When the daily price line cuts the moving average of 5 days and the line of 5 days cuts the line of 20 days, from above, there are sell signals. The buy signals are when the actual prices cut the moving average lines from below.

Charts
Te drawing of charts, diagrams, graphs, etc. is a method by which the technical analysis is made. These charts depict the trends in prices, rate of changes in prices, volume of trading, etc. There are various types of charts, namely, point charts, line charts, vertical bar charts, etc. All these would depict the trends in prices and breadth of trading which are both indicators of buying and selling pressures and the market behaviour.

Head of Shoulders
The configurations emerging from the charts show different patterns. Of these, the most important is the “Head and Shoulders.” It depicts a top and a reversal pattern in either the bull phase or the bear phase. (Fig.). The left shoulder is formed when the prices reach the top under a strong buying impulse and trading volume becomes less than it did during the upswing to reach the top. Then there is another high volume advance which takes the price to a higher top than in the case of the left shoulder. This is called the  “Head” top and followed by another reaction on less volume which takes prices down to a bottom near to the earlier recession. The third rally which takes the prices up reaches a height of less than that of the head and results on the right shoulder, which has a comparable height as the left shoulder. This type of configuration occurs under a bull phase and the exactly reverse configuration occurs in a bear phase. This is indicative of a likely reversal of the trend.

Breaking the Neckline
IF the prices are having an uptrend movement in a bull phase and the configuration of the head and shoulders is noticed, then the analyst has to look for a possible trend reversal indicator. This can be noticed when the third recession cuts the support line down across the bottoms of the two reactions between the left shoulder, hea, and the right shoulder (called the neckline) and the actual price line should go below the neckline by about 3 to 5 points of the market price (Fig. ). There are a number of other patterns which are to be looked into by analysts, if they are doing an in-depth analysis. These patterns are useful to identify the primary of secondary trends. Some signs of reversal can be seen in the “rounding turns” and triangles and gaps. However, some gaps are attributed to exdividend, ex-bonus, etc. or due to symptoms of consolidation and acceleration or exhaustion and reassessment or it may be a break away gap of the market. Some insight into the future movement of prices can be had by a close study of the pattern that prices are making. Thus forecasting is a practical use to which the charts in general and these configurations in particular can be put to. The bull market indicators are as follows. The bear market has been in progress for a long tie. The peaks of advancing points are still sloping upwards. The number of advancing points is substantially higher than the number of declining points. Then if the stock establishes certain levels of accumulation and consolidation over a number of days or weeks and if the volume of trading slows down, then it is certain that distribution is taking place and it will meet with the resistance level soon. So, as a rule, it is safe to buy at the top or three points below or around the old bottom. The bear market indications may be set out as follows. A bull market has been in progress for a long time. The recovery is occurring on low volume and the number of advancing points is only slightly higher than the number of declining points. The line connecting the peaks of declining point is sloping upwards but the price line may cross the support level soon due to exhaustion of the market pressure. It is better to sell at the previous high topeak or 3 points around that high.

Resistance and Support Lines
The points and figure charts should clearly indicate the bull or bear phases. But some configuration does not clearly indicate the definite signals such as in the case of a symmetrical triangle. While the ascending triangle and decending triangle indicate the upward and downward phases respectively (Figs.) Consolidation refers to tie interval in which the price of a share does not break through in either direction. Then the price movements are in a narrow band with both the resistance and support lines moving horizontally.

Speculative Trading and Technical Analysis
Timing of purchase and sale is very important particularly for speculative trading. The basic rule is to follow the daily chart of highs/lows or tops/bottoms. When the long-term trend is bullish and price trend is pointing up, the advance line must make higher tops and higher bottoms. One can enter the market any time so long as the uptrend is continuing as indicated by the higher tops and bottoms. The best buy point is when the prices decine by 50% of the higher ever peak achieved or at a level of 50% between the extreme low and extreme high. The best points to sell are when prices rise to the old top levels or near to those levels or when the prices start advancing after beng below the 50% point between the extreme high and extreme low. There is no sanctity of these levels, as they are set by experience and observation. Experience and analysis are the best guides in these matters. Before taking the buy and sell decisions, one has to observe the rules of the game :
i. Put stop loss order at, say, 10% of one’s capital at any time. This will protect the extent of losses possible in speculation.
ii. Draw the daily, weekly, monthly charts separately and observe the highs and lows and the mid-points and turning points carefully. The buy and sell signals can be located at 3 points below the highs or 3 points above the lows, etc.

Elliot Wave Theory
There are a number of theories which seek to explain the behaviour of the market. In the area of technical analysis, one such theory is that of Ralph Elliot. According to this theory, the market is unfolded through the basic rhythm or pattern of 5 waves up and 3 down to form a complete cycle of 8 waves. This wave principle is dervied from empirically tested rules from the studies on stock market price trends. The basic pattern of waves is reflected in various cycles and waves. One complete cycle consists of waves made up two distinct phases - bullish and bearish. Thus the wave 1 is upwards and wave 2 corrects the wave 1. Similarly, waves 3 and 5 are those with an upward impulse but are corrected by waves 4 and 6 respectively. An entire sequence of 1 to 5 waves is corrected by the sequence of bearish waves, namely, A,B,C. Thus, in a complete cycle, there are 5 bullish phases and 3 bearish phases,. The impulse waves are the waves in the direction of the main trend and the corrective waves are less in number but reverse the earlier trend. This is based on the principle that action is followed by reaction. Once the full cycle of waves is completed after the termination of the 8-wave movement, there will be a fresh cycle starting with similar impulses arising out of market trading, change of sentiment in the market etc. Again there will be 5 cycles upwards constituting the bullish trend and 3 waves downward constituting the bearish trend. According to the followers of Elliot wave theory, accuracy and timeliness of the waves is the basis for their usefulness in identifying the buy and sell signals in the market. A lot of empirical work has gone into the stuyd of the waves any cycles of prices. It has been found that the behaviour of prices on the stock markets conforms to the cycles and waves and it is possible to use these data for predicting the price change and deciding on the buy and sell signals.

Operation of Wave Theory 2
The wave is a movement of the market price from one change in the direction to the next change in the direction. The waves are result of buying and selling impulses emerging from the demand and supply pressures on the market. If the demand exceeds supply, there is pressure of overbought position leading to a rise in prices. If the supply exceeds demand, there isan oversold position in the market leading to a downward trend in the prices. Depending on the pressure of the oversold and over bough position, the waves are generated in the prices. The stock market has been found to behave in a consistent manner giving rise to a basic rhythm and a wave movement in prices. The basic rhythm is reflected in 3 impulses in one direction followed by 2 waves of corrective nature with a total of 5 in the wave phase and 3 cycles in a reverse phase. These 3 correct the entire movements of 5 major upward movements. The personality of each wave is an integral part of the reflection of mass psychology that it embodies. Although sometimes these wave counts are not clear, the shape and length may vary depending on the buying and selling pressures. But the analysts
who have the experience and expertise can discern the waves in both upward and downward directions and also the impulse waves and corrective waves. These will help the analyst to learn what the chart tells regarding the phase and turning points. The wave principle offers the tools of identifying the market turns and their approach. As a limitation, however, it should be noted that the wave theory is not perfect and there are many limitations in its practical use. The rhythm as well as the count number of the waves may not be consistent and it may not be possible to clearly discern the turnings points and take proper decision on buy and sell. But on the whole, it should be accepted as one of the tools of technical analysis for the investor and trader to decide on the timing of investment.

Oscillators (Rate of Change or ROC)

Oscillators refer to eh velocity of price changes reflecting the market momentum which is measured by the rate of change or prices. This rate of change may be over the short period of 5 to 10 days or a longer period of 3 to 6 months. These oscillators may also be based upon the daily market prices when the volatility of the market spread is measured on a daily basis. Most oscillators would move in the same direction, either positive or negative, depending on the trends of the market. A positive reading reflects on overbought market and negative reading reflects oversold market. These oscillators in the form of velocity of price changes are plotted around a zero line to reflect both positive and negative values of the graph. The shape of the oscillator will depend on the period for which it is calculated say 5, 10, or 20 days. If the oscillator is for a longer period, it will become a smoother curve and if it is compiled on a daily basis, it will be widely fluctuating. Usefulness of the oscillator grpah depends on a proper reading of the graph. As a general rule, if the oscillator reaches the extreme lower end, it is suggested to buy and if it is at the upper end, then the suggestion is to sell. The crossing of the zero line may also be understood as the first indication of buy and sell signals. The crossing of the zero line is an important indiator of the price trends and its direction. The market is said to be overbrough when the oscillator is at the upper extreme and is oversold when the oscillator is in the lower extreme. These points provide the signals of buy and sell to the investor. Generally, the peaks and troughs in the actual price chart also reflect the peaks and troughs of the oscillator graph. A study of oscillators is thus useful to confirm the conclusions arrived by the basic trend analysis and the use of charts.



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TECHNICAL ANALYSIS

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