CU-BCOM-SEM-IV-Fundamental and Technical Analysis in Stock Market-Second Draft

a correlation moves from positive to negative, the relationship would most likely be unstable, and probably useless for trading. The most widely accepted correlation is the inverse correlation between stock prices and interest rates, which postulates that as interest rates go up, stock prices go lower, and conversely, as interest rates go down, stock prices go up. 12.10 SUMMARY  Technical analysis is a means of examining and predicting price movements in the financial markets, by using historical price charts and market statistics. It is based on the idea that if a trader can identify previous market patterns, they can form a fairly accurate prediction of future price trajectories.  It is one of the two major schools of market analysis, the other being fundamentanalysis. Whereas fundamental analysis focuses on an asset’s ‘true value’, with the meaning of external factors and intrinsic value both considered, technical analysis is based purely on the price charts of an asset. It is solely the identification of patterns on a chart that is used to predict future movements.  Examples of technical analysis tools: Technical analysts have a wide range of tools that they can use to find trends and patterns on charts. These include moving averages, support and resistance levels, Bollinger bands, and more. All the tools have the same purpose: to make understanding chart movements and identifying trends easier for technical traders.  Being able to identify the signals for price trends in a market is a key component of any trading strategy. All traders need to work out a methodology for locating the best entry and exit points in a market and using technical analysis tools is a very popular way of doing so.  In fact, technical analysis tools are so commonly used, that many believe they have created self-fulfilling trading rules: As more and more traders use the same indicators to find support and resistance levels, there will be more buyers and sellers congregated around the same price points, and the patterns will inevitably be repeated.  There will always be an element of market behavior that is unpredictable. There is no definitive guarantee that any form of analysis – technical or fundamental – will be 100% accurate. Although historical price patterns give us an insight into an asset’s likely price trajectory, that is no promise of success.  Traders should use a range of indicators and analysis tools to get the highest level of assurance possible and have a risk management strategy in place to protect against adverse movements. 151 CU IDOL SELF LEARNING MATERIAL (SLM)

 Technical analysis is a form of security analysis that uses price data and volume data, typically displayed graphically in charts. The charts are analysed using various indicators to make investment recommendations.  Technical analysis has three main principles and assumptions: (1) The market discounts everything, (2) prices move in trends and countertrends, and (3) price action is repetitive, with certain patterns reoccurring.  Increasingly, analysts, fund managers, and individual investors are studying the basic principles of technical analysis to support their decision making in financial markets.Behavioural finance, which is the study of the influence of psychology on the behavior of investors, focuses on the fact that investors are not always rational, have limits to their self-control, and are influenced by their own biases. This relatively new field of finance is motivating more practitioners to consider technical analysis as a tool for understanding and explaining irrationalities in financial markets.  Technical analysis can be used on any freely traded security in the global market and is used on a wide range of financial instruments, such as equities, bonds, commodities, currencies, and futures. However, in general, technical analysis is most effectively applied to liquid markets. Therefore, technical analysis has limited usefulness for illiquid securities, where a small trade can have a large impact on prices.  The primary tools used in technical analysis are charts and indicators. Charts are graphical displays of price and volume data. Indicators are approaches to analyzing the charts. While the tools can be used on a standalone basis, many analysts, fund managers, and investors will find added value in combining the techniques of chart analysis with their own research and investment approach.  Charts provide information about past price behavior and provide a basis for inferences about likely future price behavior. Basic charts include line charts, bar charts, and candlestick charts.  Volume is an important element of technical analysis and is often included on charts. Volume can be viewed as a confirmation in that it indicates the strength or conviction of buyers and sellers in determining a security’s price.  One of the most important steps in successfully applying technical analysis is to define the time being analysed. Technical analysis and charting become more reliable as the time scale increases from intraday to daily, weekly, and even monthly. Analysts and investors whose primary research method are fundamental analysis will find more value in charting instruments on a weekly and/or a monthly scale. Longer time frames will allow analysts and investors to better identify the consolidation and trend periods and time their purchases or sales of securities. 152 CU IDOL SELF LEARNING MATERIAL (SLM)

 Several basic concepts can be applied to charts. These include relative strength analysis, trend, consolidation, support, resistance, and change in polarity.  Relative strength analysis is based on the ratio of the prices of a security and a benchmark and is used to compare the performance of one asset with the performance of another asset.  The concept of trend is an important aspect of technical analysis. An uptrend is defined as a sequence of higher highs and higher lows. To draw an uptrend line, a technician draws a line connecting the lows on the price chart. A downtrend is defined as a sequence of lower highs and lower lows. To draw a downtrend line, a technician draws a line connecting the highs on the price chart.  Support is defined as a low-price range in which the price stops declining because of buying activity. It is the opposite of resistance, which is a price range in which price stops rising because of selling activity.  Chart patterns are formations appearing on price charts that create some type of recognizable shape. There are two major types of chart patterns: reversal patterns and continuation patterns.  Reversal patterns signal the end of a trend. Common reversal patterns are head and shoulders (H&S), inverse H&S, double top, double bottom, triple top, and triple bottom.  Continuation patterns indicate that a market trend that was in place prior to the pattern formation will continue once the pattern is completed. Common continuation patterns are triangles (symmetrical, ascending, and descending), rectangles (bullish and bearish), flags, and pennants.  Technical indicators are used to derive additional information from basic chart patterns. An indicator is any measure based on price, market sentiment, or fund flows that can be used to predict changes in price. Mathematically calculated indicators usually have a supply and demand underpinning. Basic types of indicators include price-based indicators, momentum oscillators, and sentiment indicators.  Price-based indicators incorporate information contained in market prices. Common price-based indicators include the moving average and Bollinger Bands.  The moving average is the average of the closing prices of a security over a specified number of periods. Moving averages are a smoothing technique that gives the technical analyst a view of market trends. So, a moving average can be viewed as a trend filter. Long-term moving averages can provide important signals. A price move above the long-term moving average is a sign of an uptrend. A price move below the long-term moving average is a sign of a downtrend. 153 CU IDOL SELF LEARNING MATERIAL (SLM)

 When a short-term moving average cross over a longer-term moving average from underneath, this movement is considered a bullish indicator and is called a “bullish crossover.” When a short-term moving-average cross over a longer-term moving average from above, this movement is a bearish indicator and is called a “bearish crossover.”  Bollinger Bands combine the concept of a moving average with standard deviations around the moving average. This tool is useful in defining a trading range for the security being analysed. The Bollinger Band width indicator provides an indication of volatility. The idea is that periods of low volatility are followed by periods of high volatility, so that relatively narrow band width can foreshadow an advance or decline in the security under analysis.  Momentum oscillators are constructed from price data, but they are calculated so that they fluctuate between a low and a high, typically between 0 and 100. Some examples of momentum oscillators include rate of change (ROC) oscillators, the relative strength index (RSI), stochastic oscillators, and the MACD (moving-average convergence/divergence oscillator).  Momentum oscillators can be viewed as graphical representations of market sentiment that show when selling or buying activity is more aggressive than usual. Technical analysts also look for convergence or divergence between oscillators and price. For example, when the price reaches a new high, this outcome is usually considered “bullish.” But if the momentum oscillator does not also reach a new high, this scenario is considered divergence and an early warning sign of weakness.  Momentum oscillators also alert the technical analyst to overbought or oversold conditions. For example, in an oversold condition, market sentiment is considered unsustainably bearish.  Sentiment indicators attempt to gauge investor activity for signs of increasing bullishness or bearishness. Commonly used calculated statistical indexes are the put/call ratio, the VIX, and margin debt.  Intermarket analysis combines technical analysis of the major categories of securities—namely, equities, bonds, currencies, and commodities—to identify market trends and possible inflections in trends. Intermarket analysis also looks at industry subsectors and their relationship to sectors and industries. In addition, it measures the relative performance of major equity benchmarks around the globe.  Technical analysis can use either a top-down approach or a bottom-up approach to analyse securities. The top-down method is useful for identifying outperforming asset classes, countries, or sectors. This approach can add value to asset allocation decisions. Allocation shifts can occur within an asset class or across asset classes. The 154 CU IDOL SELF LEARNING MATERIAL (SLM)

bottom-up method is useful for identifying individual stocks, commodities, or currencies that are outperforming, irrespective of market, industry, or macro trends.  The technical analyst can add value to an investment team by providing trading/ investment ideas through either top-down or bottom-up analysis, depending on the nature of the investment firm or fund. In addition, technical analysis can add value to a fundamental portfolio approach by providing input on the timing of the purchase or sale of a security. 12.11 KEYWORDS  Dow Theory: The Dow Theory states that asset prices take into consideration all available information. Earnings potential, competitive advantage of a firm, management competence – all these factors and more are priced into the market. The closing price reflects the aggregate judgment and emotions of all the market participants.  Market Trends: Markets experience primary trends which last a year or more, such as a bull or bear market. Within these broader trends, markets experience secondary trends, often seen as a retracement against the primary trend, such as a pullback within a bull market or a rally within a bear market; these secondary trends last from three weeks to three months. Finally, there are minor trends that last less than three weeks and are generally seen as noise.  Primary Trends: A primary trend consists of three phases, according to the Dow Theory. In a bull market, these are the accumulation phase, the public participation phase, and the excess phase. In a bear market, they are called the distribution phase, the public participation phase, and the panic phase.  Indices must Confirm Each Other: To establish a trend, Dow Theory states that indices or market averages must confirm each other. Dow made use of two indices: the Dow Jones Industrial and Rail (now Transportation). A rise in Dow Jones Industrial would only be confirmed if the transportation average also confirmed the same, else there was no clear trend, and we could witness a correction. The converse of this would also hold true.  Volume must Confirm the Trend: Volume should increase if price is moving in the direction of the primary trend and should be light during a pullback. If volume picks up during a pullback, it could indicate trend reversal as more participants have turned bearish. 12.12 LEARNING ACTIVITY 155 CU IDOL SELF LEARNING MATERIAL (SLM)

1. The best way to learn technical analysis is to gain a solid understanding of the core principles and then apply that knowledge via back-testing or paper trading. Where do I learn technical analysis? ___________________________________________________________________________ ___________________________________________________________________________ 2. Technical indicators can also be incorporated into automated trading systems given their quantitative nature. What are the techniques of technical analysis? ___________________________________________________________________________ ___________________________________________________________________________ 12.13 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the problems and theses proposed in the field of: Fundamental and technical analysis carried out for the purpose of making invest? decisions? 2. In economics, does technical analysis have any scientific basis? 3. What are the currently interesting research topics in the field of behavioural finance operating in securities markets? 4. How can technical analysis patterns be explained? 5. Does fundamental or technical analysis provide better knowledge for investing in securities? Long Questions 1. Define and understand the business of the company. 2. Is the company growing consistently? At the core of fundamental analysis lies growth. A stock becomes attractive if it is growing at a consistent pace and in a sustainable manner. When we talk of growth, we talk of growth in the revenues (volumes and pricing power) as well as growth in the profits of the company. 3. How large is the stock’s Exchange Market Size? Could this be a problem when trying to get out of the stock later? 4. Who are the company’s competitors? Are they large businesses or are they small companies? Does the real threat of competition come from existing products or emerging products? 156 CU IDOL SELF LEARNING MATERIAL (SLM)

5. What are the emerging threats to the industry the company operates in? B. Multiple choice Questions 1. The oldest approach to common stock selection is: a. Fundamental analysis b. Technical analysis c. Random walk analysis d. Value analysis 2. When technical analysts say a stock has good relative strength, they mean the: a. Total return on the stock has exceeded the total return on other stocks in the same industry. b. Ratio of the price of the stock to a market index has trended upwards. c. Stock has performed well compared to other stocks in the same industry. d. Recent trading volume in the stock has exceeded the normal trading volume. 3. Market price breaking through the moving average from below is a ……indicator. a. Bullish b. Bearish c. Flat d. None of these. 4. Which of the following is not part of the bar chart? a. Opening price. b. Closing price. c. High price. d. Low price. 5. Which of the following is not a part of the candlestick chart? a. Opening price. b. Volume of trading. c. Closing price. d. Real body. Answers 157 CU IDOL SELF LEARNING MATERIAL (SLM)

1-a, 2-b, 3-a, 4-a, 5-b. 12.14 REFERENCES References  Rockefeller, Barbara. (October 2019). Technical Analysis For Dummies, 4th Edition. Dummies.  Thomsett, Michael, C. (June 2019). Understanding Momentum in Investment Technical Analysis. Business Expert Press.  LIm, Mark, Andrew. (June 2015). A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis. Wiley. Textbooks  Kirkpatrick II, Charles, D. Dahlquist, Julie, R. (October 2015). Technical Analysis: The Complete Resource for Financial Market Technicians, Third Edition. Pearson.  Pring, Martin, J. (January 2014). Technical Analysis Explained, Fifth Edition: The Successful Investor's Guide to Spotting Investment Trends and Turning Points, 5th Edition. McGraw-Hill.  GRIMES, ADAM. (July 2012). The Art & Science of Technical Analysis: Market Structure, Price Action & Trading Strategies. Wiley. Websites  https://www.niftytradingacademy.com/trading-with-gann-theory/  https://www.investopedia.com/terms/t/technicalanalysis.asp  https://www.nirmalbang.com/knowledge-center/technical-analysis.html 158 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 13 TYPES OF CHARTS STRUCTURE 13.0 Learning Objectives 13.1 Introduction 13.2 Meaning 13.3 Relevance 13.4 Steps 13.5 Types of Charts– 13.5.1 Line Chart 13.5.2 Bar Chart 13.5.3 Candle Chart 13.5.4 Point &FigureChart 13.6 Support &ResistanceLevels 13.7 Chart Patterns 13.8 Summary 13.9 Keywords 13.10 Learning Activity 13.11 Unit End Questions 13.12 References 13.0 LEARNING OBJECTIVES After studying this course, you should be able to:  Identify and extract information from tables.  Compare pie charts, bar charts and frequency diagrams.  Explain the use and interpret coordinates.  Illustrate plot points and draw graphs, using suitable axes and scales. 13.1 INTRODUCTION Technical analysis is all about timing! A stock can be performing very well, but if you make a trade at the wrong price, you can incur heavy losses. 159 CU IDOL SELF LEARNING MATERIAL (SLM)

That’s why traders use various tools to help them make the right decisions in the stock market. And one of the biggest tools they use is the stock chart! Charts and their use in the Stock market  There are three major principles in technical analysis. They are:  The stock price already reflects all the relevant information in the market  Stock prices tend to move in trends  History tends to repeat itself If stock prices do move in patterns, it can be quite valuable to study these patterns to make better trading decisions. That’s why stock charts are extremely useful for trading. What is a Stock Chart? A chart is a graphical representation of price and volume movements of a stock over a certain period. In the graphical chart, the X-axis represents the time, and the Y-axis represents the price movement. The time can vary from intra-day to even a few months or more. Types of Charts Technical analysts use a variety of charts based on the information they seek. However, there are three types of charts that are most used. They are: Line charts Line charts are composed of a single line from left to right that connects the closing prices (or any specified price data point) at each specified time interval. The chart looks like a basic graph. It gives a bird’s eye view of the historical price action in a single line. This is a popular type of chart used in presentations and reports to give a very general view of the historical and current trajectory. A common method is to draw trend lines to connect the peaks and valleys to anticipate potential price inflection and break points. For the most part, this chart may be a bit too simple for active day traders. A line chart is probably the most common type of chart. This chart tracks the closing prices of the stock over a specific period. Each closing price point is represented by a dot. And all the dots are connected by lines to get the graphical representation. 160 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 13.1:Line Charts While it is quite simplistic (compared to other chart types), a line chart helps traders to spot trends in the price movement. However, since it tracks closing prices, it does not offer much information regarding intraday price movements. Bar Charts A bar chart is quite like a line chart. However, it offers much more information. Instead of a dot, each plot point in the graph is represented by a vertical line. This line has two horizontal lines extending from both the sides. The top part of the vertical line represents the highest price at which the stock had traded during the day. Bar charts are also known as open-high-low-close (OHLC) charts. They are the Western version of Japanese candlesticks. Bar charts simply use vertical lines that extend to the highest and lowest prices for the specified period and a short horizontal line extending left at the opening price and short horizontal line extending right to indicate the closing price. The colour of the bar, like the candlestick, is based on the net gain (green) or loss (red) on the closing price. The colouring is optional. The absence of a colour filled in body between the open and close is the main distinction that between a bar chart and a line chart. Many traders feel line charts are easier to follow due to their simplicity. Bar charts tend to visualize the price range easier than candlestick charts, which tend to illustrate emotions. For example, a large red body can indicate pure fear (resulting in panic selling), which can be a distraction to some traders who prefer to maintain a neutral interpretation based on the price range expansion and contraction. 161 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 13.2: Bar Charts Similarly, the lower part represents the lowest traded price. The left extension represents the price at which the stock opened while the right extension represents the closing price for the day. In addition to offering greater detail than a line chart, the bar chart also gives insight on volatility. If the line is longer, it means that there was greater volatility in the trading of the stock. Candlestick Charts Candlestick charts were developed by Japanese rice merchants to track the price action of rice futures in the 1700s. Japanese candlesticks were first introduced to the United States through a book titled “Japanese Candlestick Charting Techniques” by Steve Nissan in 1991. The candlestick chart has become standard on almost all platforms and is the most popular style of chart used by traders. The chart utilizes the opening, high, low, and closing price data per specified time interval to generate a candlestick, which is plotted on a price chart. The candlestick is composed of three parts: the body, the upper tail and lower tail. Tails are also known as wicks. The body is composed of the opening price and closing price for the time interval also known as the period. The body is coloured either green or red. A green candle indicates the closing price was higher than the opening price, which is considered bullish since the net result is price rise. 162 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 13.3: Candlestick Charts A red candle indicates that the closing price is lower than the opening price, resulting in a net price drop, which is bearish. The upper and lower tails are two thin lines extending from the top and bottom of the body towards the highest price and lowest price for the period. Traders often search for specific candlestick pattern formations to generate trade signals Candlestick charts are very popular among technical analysts. They offer a great deal of information in a very precise manner. As the name suggests, the price movements for each day are represented in the shape of a candlestick. 163 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 13.4: Candlestick Chats It is like a bar chart because it represents the four data points: high, low, open, and close. While bar charts give volatility information only for a single trading day, candlestick charts can offer this information for a much larger time. In addition, the candlesticks come in different colours based on the price movements. A falling candlestick is generally represented by a black or red body while a rising candlestick is represented by a white or clear body. Renko Chart A Japanese invention, Renko charts, one of the major types of charts in technical analysis, focus only on price changes and use price bricks to represent a fixed price move. They filter out minor price movements which make it easier to spot trends in prices. Also, this feature makes the chart appearance more uniform. A Renko chart technical analysis is effective in identifying support and resistance levels. You get a trading signal when there is a change in the direction of trend and the bricks alternate colours. HeikinAshi Chart HeikinAshi is another type of popular technical chart that originated in Japan is quite like candlestick chart. With this chart, you can visualize the uptrend and downtrend quite clearly. 164 CU IDOL SELF LEARNING MATERIAL (SLM)

When there are continuous green HA handles without lower shadow, it’s a reflection of a strong trend. On the other hand, when there are continuous red handles without upper shadow, it reflects a solid downtrend. As the HA bars are averaged, there’s no exact open and close prices for a particular period. Head and Shoulders The head and shoulders pattern try to predict a bull to bear market reversal. Characterised by a large peak with two smaller peaks either side, all three levels fall back to the same support level. The trend is then likely to breakout in a downward motion. Figure 13.5: Head and shoulders Chats Rounding Bottom A rounding bottom or cup usually indicates a bullish upward trend. Traders can buy at the middle of the U shape, capitalising on the bullish trend that follows as it breaks through the resistance levels. Cup and Handle The cup and handle is a well-known continuation stock chart pattern that signals a bullish market trend. It is the same as the above rounding bottom but features a handle after the rounding bottom. The handle resembles a flag or pennant, and once completed, you can see the market breakout in a bullish upwards trend. Symmetrical Triangle For symmetrical triangles, two trend lines start to meet which signifies a breakout in either direction. The support line is drawn with an upward trend, and the resistance line is drawn 165 CU IDOL SELF LEARNING MATERIAL (SLM)

with a downward trend. Even though the breakout can happen in either direction, it often follows the general trend of the market. Figure 13.6: Symmetrical triangle Charts Pennant Pennants are represented by two lines that meet at a set point. They are often formed after strong upward or downward moves where traders pause, and the price consolidates before the trend continues in the same direction. Flag The flag stock chart pattern is shaped as a sloping rectangle, where the support and resistance lines run parallel until there is a breakout. The breakout is usually the opposite direction of the trendlines, meaning this is a reversal pattern. Learn more about breakout stock patterns. Wedge A wedge pattern represents a tightening price movement between the support and resistance lines, this can be either a rising wedge or a falling wedge. Unlike the triangle, the wedge doesn’t have a horizontal trend line and is characterised by either two upward trend lines or two downward trend lines. 166 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 13.7: Wedge Charts For a downward wedge, it is thought that the price will break through the resistance and for an upward wedge, the price is hypothesised to break through the support. This means the wedge is a reversal pattern as the breakout is opposite to the general trend. Point & Figure Chart One of the common types of charts in technical analysis, Point and Figure Chart using vertical rows of X’s and O’s. When price of a share goes up, it’s indicated in the row of X’s. On the other hand, when it goes down, the same is indicated by the vertical row of O’s. This chart for technical analysis is easy to plot and the patterns are easy to follow. A disciplined method of identifying current and emerging trends, Point & Figure Chart can help you in easy determination of entry and exit points. 167 CU IDOL SELF LEARNING MATERIAL (SLM)

Figure 13.8: Point & Figure Chart Originally developed as a price recording system, they have evolved to become a charting method. These simple charts only focus on the significant price moves, while filtering out ‘noise’. The X’s and O’s display very easy trends to follow and draw trendlines. The charts are composed of X’s and O’s representing net price changes. X columns represent rising prices and O columns represents falling prices. The increments can range from days to months and are labelled by numbers and letters. All labels are written in boxes. Each box represents an incremental period like one day or a range of days, all contingents on the price movement. Columns can be either Xs or Os but not both. The unique aspect of these charts is that the time input is not used on a linear basis, like candlestick, line, and bar charts. As price rises or falls beyond a level, depending on the method, then a new column is started. This usually requires a price move equal to or greater than the reversal distance. There are many varied ways to mark P&F charts from using just the close or the high and lows. Only one data point is used one box at a time. The simple X and O columns can already give a clear visual of resistance levels and the trends. In the example, the 19 is a clear resistance that is strong enough to exhaust buyers and reverse the uptrend into a downtrend back down towards the 10-support area. Tom Dorsey is one of the innovators of this methodology and has written much in-depth material on strategies to using P&F charts. Double Bottom 168 CU IDOL SELF LEARNING MATERIAL (SLM)

A double bottom looks like the letter W and indicates when the price has made two unsuccessful attempts at breaking through the support level. It is a reversal chart pattern as it highlights a trend reversal. After unsuccessfully breaking through the support twice, the market price shifts towards an uptrend. Figure 13.9: Double bottom Charts Double Top Opposite to a double bottom, a double top looks much like the letter M. The trend enters a reversal phase after failing to break through the resistance level twice. The trend then follows back to the support threshold and starts a downward trend breaking through the support line. Read more about trading with double top and bottom patterns. Figure 13.10: Double Top Charts 169 CU IDOL SELF LEARNING MATERIAL (SLM)

As a trader in the stock market, it is important for you to be able to read a chart and understand the information that it represents. This can help you identify price patterns in the stock market and make better trading decisions. 13.2 MEANING Money, money, money! It is all about prices, even in the stock market. A good stock can be loss-making if you buy it at the wrong price. For this you need to know what a chart is. Technical analysis is all about getting the price right. It even plots market trends using stock prices. All this action, though, happens in a place called ‘stock chart’. Analysis of market trends is the first tool that is used in technical analysis. However, trend analysis cannot be done unless historical stock charts are available. This is because trends are discovered in the charts themselves. It is, therefore, critical to understand what a chart is and how to perform stock chart analysis to excel at technical analysis. As we discussed earlier, trying to perform technical analysis without using stock charts is like trying to build a house without owning land! So, we must try to understand how to read the charts. But before we get to that, let’s try to answer the question, what is a stock chart? Put in the simplest possible terms, it is a graphical representation of how a stock’s price or trading volumes have changed over time. This relationship can be presented in several ways, using different types of charts. It is your job, as a technical analyst, to identify the type that will bring out a hidden trend most effectively. Stock charts, like all other charts, have two axes—the vertical axis and the horizontal axis. The horizontal axis represents the historical time periods for which a technical chart has been constructed. The vertical axis displays the stock price or the trading volume corresponding to each period. Figure 13.11: Stock Charts 170 CU IDOL SELF LEARNING MATERIAL (SLM)

There are many types of charts that are used for technical analysis. However, the four types that are most common are—line chart, bar chart, point and figure chart and candlestick chart. We will discuss these technical charts extensively later. However, we have illustrated three types of stock charts below. The bar chart looks a lot like the candlestick chart. All the charts displayed below are stock price charts. The nature of the input may, however, must be altered when you move from one chart type to another. In this section, we will understand what a chart is and briefly discuss stock charts. We will also understand what trend lines are and how they can be combined with stock charts to make useful deductions about stock prices movements. It’s not uncommon for us to get messages from people that are attracted to the idea of investing, but that lack the essential training or confidence to fully dive in. A chart is a graphical representation of price and volume movements of a stock over a certain period. In the graphical chart, the X-axis represents the time, and the Y-axis represents the price movement. The time can vary from intra-day to even a few months or more. For example, we hear from millennials all the time – many are starting to save and know they need to invest, but they’ve never had to look at a stock chart before. We also often hear from wealth managers that want to help their clients understand the financial landscape better. Today’s post explains a concept that’s important for any person looking to dive headfirst into finance. What is a stock chart? The following infographic from StocksToTrade shares the three most common types of stock charts used, and the information typically found in them. What is a stock chart? It’s simply a price chart that shows a stock’s price plotted over a time frame, and it shows a few key sets of information: 1. Stock symbol and exchange The symbol for the stock, as well as the specific exchange it trades on. 2. Chart period Typically daily, weekly, monthly, quarterly, or annually. Traders usually concentrate on daily and intraday data to forecast short-term price movements. Investors usually concentrate on weekly and monthly charts to spot long-term price trends. 3. Price Change There are four key data points from a day’s trading: open, high, low, and close. “Open” is the price at the start of the day and “close” is the price at the end of the day. The “high” is the highest price during the session, while the “low” is the lowest. 171 CU IDOL SELF LEARNING MATERIAL (SLM)

4. Last Change Displays the net change, positive or negative, from a previous price. On a daily chart, it would be from the previous day’s close. 5. Types of Charts There are three basic types of charts used: Line: Plots the closing price of a chart over time, helping you to see how a price is behaving. Bar chart: Plots the open, high, low, and close (OHLC) for each day using bars. Candle and stick chart: A visually appealing chart like a bar chart that shows OHLC data in an easy way. 6. Volume Volume is the amount of stock that has been bought and sold within a specific period. If a stock moves on low volume, it means that few people are participating in the current price movement and the trend may not continue. Meanwhile, if a stock moves on high volume, it means many people are involved in the trade and the trend is more likely to continue. 13.3 RELEVANCE Investing in the stock market requires caution and a fair bit of knowledge such that investors continue to incur profits rather than losses. Stock chart technical analysis, therefore, plays an important role as it helps investors and traders alike in making informed decisions. It records a stock’s history, illustrates current conditions, and serves as a roadmap to show whether a stock is trending up or down. All experts, masters, and professionals have specialized tools to gather information, evaluate conditions, and make decisions with confidence. For investors, the stock chart is the tool that separates the novice from the Market Smith. What are the aspects of Stock Charts? Price and Volume The charts are generally divided into two parts: the price of the stock and the volume of the stock. For correct stock chart analysis and reading of stock chart patterns, it is important to read both price and volume together. This is because if you look only at the movement of the price you would not know how genuine the buying or selling is. For example, a stock has fallen over 5%. Initially, it may look very bad but if the fall is with lower volumes than the average, you may continue to hold the stock because the selling is not done by large retailers who drive the market. The same is the case when the stock is rising but with lower volumes. This rise in the stock price could be fake because when the big players enter the stock there would be a huge rise in the volumes. Moving Average Lines 172 CU IDOL SELF LEARNING MATERIAL (SLM)

Moving average lines are very important to understand the performance of a stock. They represent the movement of the share price over a period. With the help of moving average lines, you can understand whether the stock is overbought or oversold by large retail participants. The mutual funds and big institutions follow the stock chart patterns and change their positions in stocks when the price rises or moves below the moving average point on the graph. The key moving average points can be a 50-day line, 15-week line, etc. When the stock falls below the benchmark moving average line, the big players often sell their holding and exit the stock. Similarly, when the price moves above the benchmark moving average line, the big players enter, and the stock price can rise sharply. Relative Strength Line Relative strength line helps to identify if the stock is a market leader or laggard. This is done by comparing the performance of a stock with the index i.e., Nifty or Sensex. A sharp line rising upwards on the graph indicates that the stock is outperforming the market while a sharp line downwards is an indication that the stock is a laggard and underperforming the overall market. The stock comes in the leadership territory when the Relative Strength line is rising for a breakout and set for a new high in the market. Share Market Technical Analysis Investors are encouraged to complete a full-scale technical analysis of stock charts as it allows future price movements of said stocks to be predicted keeping in mind their previous price movements. Stock charts record price and volume history to help you determine whether the stock is appreciating or depreciating in value. But skilled chart readers can determine much more by learning how to read stock charts. Subtle clues in the price and volume action can tell you many things including whether the stock is:  Behaving normally or abnormally,  Falling in or out of favour with institutional investors  Beginning or ending a price advance This technical analysis helps aid buy, hold, and sell decisions. While it might not always give rise to accurate results, it allows investors and traders alike to expect certain actions in the future. A free Demit account can be opened by you today such that you too can partake in the technical analysis of stocks. Significance of Engaging in Stock Chart Technical Analysis 173 CU IDOL SELF LEARNING MATERIAL (SLM)

Price charts pertaining to a given stock can be made by analyzing stock charts. The importance of technical analysis is evident in the fact that it can help draw attention to the following factors.  Any instability in the stock prices over time is more apparent.  The intrinsic value of the stock, as opposed to the market value, is easier to discern.  The stock’s general ability to function in the markets  The impact certain events have had on the value of the stock prior to and following their occurrence is apparent.  Price fluctuations that have persisted are now easier to identify.  The trading levels and volume of trade made pertaining to a given share are easier to discern.  Support and resistance levels can be noticed with greater ease.  With the aid of this analysis, investors can identify the best time to enter or invest in a certain stock thereby allowing for greater returns on investment.  Prevailing market trends are easier to catch onto. Moreover, distinguishing between those that are short-term trends and those that are long-term trends is easier. Having an active knowledge of the same is pertinent such that educated and informed investment and trade decisions can be made. Stock Chart Patterns One way to assess technical strength is to evaluate the quality of the stock chart patterns that are made as the stock moves up in price. There are numerous chart patterns that skilled chart readers use to determine the health and direction a stock is trending. But again, none of that analysis can be done without a proper chart. The probability of making money in the stock market rises significantly if you are using stock charts. You can properly evaluate the current conditions and make informed decisions. Daily Stock Chart A daily stock chart on a graph represents the movement of the stock price on a specific day of trading. The day traders use daily stock chart patterns to take intraday positions. The chart has multiple moving day averages like 50 days, 100 days, etc. which the traders monitor continuously to take positions. When the stock rises sharply it is represented by a sharp line rising upwards and when the stock falls, the graph shows a sharp fall in the line. Weekly Stock Chart Just like a daily stock chart represents the stock price movement on a single day, similarly, the weekly stock chart represents the price summary of stock for a single week. This chart is 174 CU IDOL SELF LEARNING MATERIAL (SLM)

generally used to forecast the price of stocks for the long-term. The weekly charts can display longer-term data on the screen which makes it easy for the analysts and investors to determine the long-term trend of a stock. The new investors often get confused between the weekly and daily charts. The confusion is mainly regarding which charts are suitable for them. This section of the article will try to resolve that dilemma. Daily Vs. Weekly Charts The daily charts are said to be good for the traders who are looking for volume and price action on an intraday basis. The stocks on daily charts are said to be giving a breakout when it breaches the 50-day line on either side. On the other hand, for long term investors, weekly charts are ideal. These charts forecast the long-term price of a stock along with its trend. It also keeps the investor's emotions under control as they can take wrong decisions looking at the volatile daily chart movements. Stock Chart Analysis One of the keys to continual success in the stock market is being able to identify which stocks have the greatest potential to become a big leader in the next bull market cycle. History has proven that great stocks display outstanding technical action before beginning their tremendous price runs. “Technical,” in this case refers to the characteristics displayed on a stock chart: price and volume. Technical stock chart analysis can help you size-up the potential opportunities and risks of buying or selling stock, enabling you to better react to changes in the behaviour of stocks you own. Evaluating a stock’s price trend, support and resistance levels, relationship to key moving averages, and many other techniques can only be executed with the use of a stock chart. Open a free Demit account today such that you can use the knowledge you have learned here on the stock markets. It is important to do due diligence prior to making any buy, sell or hold decisions pertaining to securities you might have your eye on. This preliminary research can reduce the potential of your incurring any risks and / or losses and can potentially allow you to accrue greater returns. Now that you have a better understanding of the significance of stock chart technical analysis, you can begin incorporating it when you (or a professional on your behalf) can look at market conditions, your financial goals and assess your risk tolerance prior to attempting to benefit from bonus shares. 13.4 STEPS Charts are a technical trader's portal to the markets. With so many advances in analysis platforms, traders can view a tremendous assortment of market information. But with so much data available, it's important to create well-designed charts that will enhance, not 175 CU IDOL SELF LEARNING MATERIAL (SLM)

hinder, your market analysis. The faster you can interpret market information, the faster you can react to the changing conditions. Chart Colours While it can be fun to experiment with different chart colours, and many chart analysis platforms support literally hundreds of colour choices, you should remember that a lot of time will be spent looking at the chart. Choosing colours that are easy to view is a must. Not only do individual colours on the chart need to be visually pleasing, but they all must also work together to create a well-contrasted chart. BackgroundColours In general, chart backgrounds are best kept to neutral colours; white, gray, and black work well. Bright or neon colours may become intolerable over even a short period of time and can make chart indicators harder to see. Once you've selected a pleasing, neutral background colour, you can fine-tune the rest of the chart. You'll need to select colours for things like grid lines, axis, and prices. Again, it is a good idea to leave these in a neutral colour, but one that contrasts with the chart background. A light Gray background with a black or dark Gray grid, axis, and price components, for example, creates an easy-to-read chart. Price Bar and Indicator Colours You can apply price bars and indicators to your chart and the colours for these should really stand out from the chart background. After all, this is what you're really watching. Price bars in red (for down bars) and green (for up bars) will show up well against any of the neutral background colours. In addition, most analysis platforms provide a variety of shades of reds and greens to choose from to further increase visibility. Price bars in black (for down bars) and white (for up bars) stand out very well against a Gray background. Indicators should be in contrasting colours so that any data can be easily seen and interpreted. Special Colour Considerations An additional idea to consider is using different colours for charts that serve different purposes. Maximizing the visual impact of your stock charts will depend upon the types of indicators you use for your analysis. For example, you might create some graphs to determine entry and exit decisions, while you create others simply for learning purposes. If more than one symbol is being traded, you might consider a different background colour for each ticker to make it easier to rapidly isolate data for each individual stock. Layout Designing the overall workspace (all the charts and other market data that appear on your monitors) requires consideration as well. Multiple Monitors 176 CU IDOL SELF LEARNING MATERIAL (SLM)

Having more than one monitor is extremely helpful in creating an easy-to-interpret workspace simply because there is more opportunity to follow more securities. Ideally, one monitor should be used for order entry and any remaining monitors are used for charts and other market analysis tools. If you're using the same indicator on multiple charts, for instance, a stochastic oscillator, it is a good idea to place like indicators in the same location on each chart, using the same colours. This makes it easier to find and compare the specific indicator on different charts. Figure 1 shows an example of a two-monitor workspace, with the order entry screen on the left monitor and the chart analysis screen on the right monitor. Indicators and Overlays To minimize extraneous market data, be sure that all the data (including indicators) is pertinent, useful, and is being used regularly. If it is not, remove it from the chart—it will only create clutter. Carefully choosing what is included on charts is a matter of trial and error; you should experiment with different data to discern between necessary and unimportant analysis tools. More than four or five open windows or charts on the same screen can get confusing. A main price chart can include overlays—those indicators that are drawn directly over the price bars. These include tools such as moving averages and Bollinger Bands®. Charts can also contain sub-charts to house additional indicators such as the Consumer Confidence Index (CCI) and the relative strength index (RSI). Remember to arrange the indicators in the same way on each chart so it will be easier to find and interpret the data. Sizing and Fonts Using bold and crisp fonts will allow you to read numbers and words with greater ease. Font size should be determined by how many charts are squeezed into one monitor, the relative importance of any written information, and ultimately your ability to read fine print. It is helpful to experiment with different fonts and sizes until you find a comfortable choice. Once you've decided upon the font and size, consider using the same selection on all charts. Again, this continuity will aid in creating charts that are easy to read and interpret. Saving Charts Once you have a chart or workspace setup, you're happy with, you should save it for future use. (See the platform's \"Help\" section for directions.) It's not necessary to reformat your charts and workspaces each time you open the analysis platform. It's also a good idea to take a screenshot for backup purposes. Since setting up the charts and workspaces is time- consuming, it's in your best interest to have a quick method of restoring any lost settings. Choose a broker with whom you feel comfortable but also one who offers a trading platform that is appropriate for your style of trading. 177 CU IDOL SELF LEARNING MATERIAL (SLM)

Although time-consuming, setting up efficient charts and workspaces is well worth the effort. Being able to quickly access and interpret market data is an essential component in the competitive trading arena. You may have all the right information to make smart trade decisions, but if you can't find and interpret that data quickly, it is useless. Creating high- performance chart setups can help you increase your situational awareness and thus become a more efficient and profitable trader. 13.5 TYPES OF CHARTS Stock charts, like all other charts, have two axes—the vertical axis and the horizontal axis. ... There are many types of charts that are used for technical analysis. However, the four types that are most common are—line chart, bar chart, point and figure chart and candlestick chart. 13.5.1 Line Chart What Is a Line Chart? A line chart is a graphical representation of an asset's historical price action that connects a series of data points with a continuous line. A line chart is a way of visually representing an asset's price history using a single, continuous line. A line chart is easy to understand and simple in form, typically only depicting only changes in an asset's closing price over time This is the most basic type of chart used in finance, and it typically only depicts a security's closing prices over time. Line charts can be used for any timeframe, but they most often make use of day-to-day price changes. Understanding Line Charts A line chart gives traders a clear visualization of where the price of a security has travelled over a given time. Because line charts usually only show closing prices, they reduce noise from less critical times in the trading day, such as the open, high, and low prices. Line charts are popular with investors and traders because closing prices are a very commonly viewed piece of data related to a security. Advantages and Disadvantages of Using Line Charts Traders can be overwhelmed with too much information when analyzing a security’s chart. The trading term “paralysis by analysis” is used to describe this phenomenon. Using charts that show a plethora of price information and indicators can give multiple signals that lead to confusion and complicate trading decisions. Line charts are also ideal for beginner traders to use due to their simplicity. They help to teach basic chart reading skills before learning more advanced techniques, such as reading Japanese candlestick patterns or learning the basics of point and figure charts. Volume and moving averages can easily be applied to a line chart as traders continue their learning journey. 178 CU IDOL SELF LEARNING MATERIAL (SLM)

On the other hand, line charts may not provide enough price information for some traders to monitor their trading strategies. Some strategies require prices derived from the open, high, and low. For example, a trader may buy a stock if it closes above the high price of the previous 20 days. Also, traders who use more information than just the close do does not have enough information to back-test their trading strategy by using a simple line chart. Candlestick charts, which contain an asset's daily open, close, high, and low prices all in the same unit may be more useful in these cases. What Is a Line Chart Used for? A line chart is a type of chart used to show information that changes over time. Line charts are created by plotting a series of several points and connecting them with a straight line. Line charts are used to track changes over short and long periods of time. What Is an Example of a Line Chart? A line chart is used to show the change of information over a period. The horizontal axis is usually a time scale, for example, minutes, hours, days, months, or years. For example, you could create a line chart that shows the daily earnings of a store for five days. The horizontal axis would include the days of the week, while the vertical axis would have the daily earnings. What Are the Types of Line Charts? In statistics, there are three main types of line charts: a simple line chart, multiple line chart, and a compound line chart. A simple line chart is plotted with only a single line. A simple line chart shows the relationship between two different variables: for example, the day of the week and the closing price of a security. A multiple line chart is a line chart that is plotted with two or more lines. It is used to depict two or more variables that change over the same period. A compound line chart is used when information can be subdivided into different types. A compound line chart expands upon the simple line chart; it shows the total data set, plus the different types of data that make up the set. What Is a Stacked Line Chart? A stacked line chart is used to compare trends over time. It is constructed with two or more sets of data; the different data sets are typically given corresponding-coloured lines. In a stacked line chart, the data values are added together. How Do I Make a Line Chart in Excel? You can use a line chart in Excel to display trends over time. In Excel, line charts are appropriate if you have text labels, dates, or a few numeric labels on the horizontal axis (x- axis). 179 CU IDOL SELF LEARNING MATERIAL (SLM)

13.5.2 Bar Chart A bar chart visually depicts the open, high, low, and close prices of an asset or security over a specified period. The vertical line on a price bar represents the high and low prices for the period. The left and right horizontal lines on each price bar represent the open and closing prices A bar chart is a graph characterized by a vertical bar and it’s used by technical analysts to learn more about trends. In trading, a single bar is used to represent a single day of trading. As one of the most popular chart types aside from candlesticks, it represents price activity within a given period. As a result, traders and investors use this chart type to spot trends and patterns. What you need to know is that a bar chart is like the candlestick. The only difference is that the body of a bar chart is not filled like that of a candlestick. As the western version of the Japanese candlestick, they help investors and traders to observe the contraction and expansion of different price ranges. To better understand a bar chart, you need to learn its different parts. High– This is located at the peak of single bar. It represents the highest price of the day or for the time you are using. Open– This is the first price where a security first trades and it happens only when the stock exchange opens for trading. This is represented by a horizontal bar close to the foot of the vertical bar. Low – As the lowest price traded for the day, it is located at the foot of the vertical bar. Close – As the last price traded for the day, it is represented by a horizontal bar projecting to the right ad positioned close to the top/peak. During this time, traders are supposed to exit a trade or complete transactions before the market closes. Direction– The bar chart does indicate direction, and this is represented by the opening and closing feet. What you need to know is that if the opening foot is above the closing foot, it indicates an upward progress. When the closing foot is below the opening foot, this indicates that the price has moved downwards. Range – This is represented by the location of both the top and bottom of the vertical bar. The value of Range is calculated by subtracting the low from high. A bar chart belongs to the OHLC charts or Open-High-Low-Close chart types and as such, it is formed through the connection of a series of price points. As a result, the chart is plotted on both X and Y axis. The X axis represents time which is plotted in terms of days while the Y axis represents price. Types of Bars 180 CU IDOL SELF LEARNING MATERIAL (SLM)

These are four types of bars. First and foremost, you have the up day or up bar. This is represented by the high and low of a bar being higher than that of the previous bar. Secondly, we have the down day. This is represented by the high and low of the previous bar being higher than the current bar. Thirdly, we have inside day. This is represented by the high and low of a bar having a shorter range than the previous bar. Lastly, we have outside day. This is represented by the previous bar having a shorter range than the current bar. 13.5.3 CandleChart Candlestick charts are a type of financial chart for tracking the movement of securities. ... Each candlestick usually represents one day's worth of price data about a stock. Over time, the candlesticks group into recognizable patterns that investors can use to make buying and selling decisions. What is a Candlestick? It is known as a hanging man. These candlesticks have a similar appearance to a square lollipop and are often used by traders attempting A candlestick is a type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period. It originated from Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before becoming popularized in the United States. The wide part of the candlestick is called the \"real body\" and tells investors whether the closing price was higher or lower than the opening price (black/red if the stock closed lower, white/green if the stock closed higher). The candlestick's shadows show the day's high and low and how they compare to the open and close. A candlestick's shape varies based on the relationship between the day's high, low, opening and closing prices. Candlesticks reflect the impact of investor sentiment on security prices and are used by technical analysts to determine when to enter and exit trades. Candlestick charting is based on a technique developed in Japan in the 1700s for tracking the price of rice. Candlesticks are a suitable technique for trading any liquid financial asset such as stocks, foreign exchange and futures. Long white/green candlesticks indicate there is strong buying pressure; this typically indicates price is bullish. However, they should be looked at in the context of the market structure as opposed to individually. For example, a long white candle is likely to have more significance if it forms at a major price support level. Long black/red candlesticks indicate there is significant selling pressure. This suggests the price is bearish. A common bullish candlestick reversal pattern, referred to as a hammer, forms when price moves substantially lower after the open, then rallies to close near the high. The equivalent bearish candlestick to pick a top or bottom in a market. 181 CU IDOL SELF LEARNING MATERIAL (SLM)

Two-Day Candlestick Trading Patterns There are many short-term trading strategies based upon candlestick patterns. The engulfing pattern suggests a potential trend reversal; the first candlestick has a small body that is completely engulfed by the second candlestick. It is referred to as a bullish engulfing pattern when it appears at the end of a downtrend, and a bearish engulfing pattern at the conclusion of an uptrend. The harami is a reversal pattern where the second candlestick is entirely contained within the first candlestick and is opposite in colour. A related pattern, the harami cross has a second candlestick that is a doji; when the open and close are effectively equal. Three-Day Candlestick Trading Patterns An evening star is a bearish reversal pattern where the first candlestick continues the uptrend. The second candlestick gaps up and has a narrow body. The third candlestick closes below the midpoint of the first candlestick. A morning star is a bullish reversal pattern where the first candlestick is long and black/red-bodied, followed by short candlestick that has gapped lower; it is completed by a long-bodied white/green candlestick that closes above the midpoint of the first candlestick. 13.5.4 Point &FigureChart The key to point-and-figure charting is the box size, or the amount of price movement that determines whether a new X or O is added to the chart. For example, say the box size is $3. If the last X happened at a price of $15, a new one is added to the current column of X's when the price rises to $18. Point and Figure Charts (PnF) are another example of a chart type that relies solely on price movements and not time intervals during the creation of the chart. In this way, PnF Charts are likeRenko, Kagi and Line Break Charts. In a basic understanding of PnF Charts, you can understand that they are comprised of a series of columns made from either X's or O's. X columns represent rising prices, while columns consisting of O's denote falling prices. Point and Figure Charts were originally popular in the early 1900s, before the prominence of computer-based charting. They were a way for technical analysts to chart large amounts of data in a short period of time. With the rise of computers, PnF Charts fell out of favour for quite a while. However, more recently, PnF Charts are once again gaining popularity. Overall, there is a renewed interest in \"noise filtering\" charts, which solely focus on price movements. The X's and O's that make up each column occupy a space called the Box Size. The box size is a user determined value. When price moves enough in the same direction as the current column, a new X or O is added to that column. When price closes far enough away in the opposite direction, a new column begins with either an X or an O (The opposite of the previous column). The amount that price must move is determined by the reversal distance. This value is created by multiplying the box size by another user defined value, the Reversal Amount. The reversal amount is the number of bricks price must move for a new letter to be 182 CU IDOL SELF LEARNING MATERIAL (SLM)

drawn or a new column to be created. Therefore, if the box size is set to 1 ($1) and the reversal amount is set to 3, then price must move $3 for a new letter to be added to the chart. There are two rules regarding the letters and columns. 1. Each column must be either X's or O's. There can never be two different letters in the same column. 2. X columns and O columns will always alternate. You will never see two X columns side by side and vice versa. Box Types There are four different types of lines that can be drawn within a PnF Chart. 1. Up Bars — Form during an uptrend. 2. Down Bars — Form during a downtrend. 3. Projected Up Bars — During an intraday timeframe, a potential up line that would form based on current price (before actual closing price is set). 4. Projected Down Bars — During an intraday timeframe, a potential down line that would form based on current price (before actual closing price is set). Box Calculation Methods There are two different methods for calculating reversal distance: Average True Range (ATR) — Uses the values generated by the Average True Range (ATR) indicator. The ATR is used to filter out the normal noise or volatility of a financial instrument. The ATR method “automatically” determines a good reversal distance. It calculates what the ATR value would be in a regular candlestick chart and then makes this value the reversal distance. Traditional — Uses a user-pre-defined absolute value for the box size and reversal amount. New boxes are only created when price movement is larger than the pre-determined reversal amount. The upside to this method is that it is very straightforward, and it is easy to anticipate when and where new boxes will form. The downside is that selecting the correct box size for a specific instrument will take some experimentation. Uses of Point and Figure Charts As with the other previously mentioned noise filtering charts, Point and Figure Charts are gaining in popularity because they do not factor in time or minor, naturally occurring price movements. Proponents of these types of charts believe that this characteristic makes it easier for users to spot trends and anticipate future price movements. For example, Point and Figure charts are great for visualizing trend lines, support and resistance levels and breakouts. 183 CU IDOL SELF LEARNING MATERIAL (SLM)

Trendlines — Point and Figure Charts were originally drawn by hand on graph paper. Because of their nature, 45-degree(is) trend lines can form naturally. These lines are a good way to identify overall trends, which can be beneficial on their own as well as with additional tools or indicators. 13.6 SUPPORT &RESISTANCELEVELS While discussing candlestick patterns, we had learnt about the entry and the stop loss points. However, the target price was not discussed. We will discuss the same in this chapter. The best way to identify the target price is to identify the support and resistance points. The support and resistance (S&R) are specific price points on a chart expected to attract the maximum amount of either buying or selling. The support price is a price at which one can expect more buyers than sellers. Likewise, the resistance price is a price at which one can expect more sellers than buyers. On a standalone basis, traders can use S&R to identify trade entry points as well. The Resistance As the name suggests, resistance is something which stops the price from rising further. The resistance level is a price point on the chart where traders expect maximum supply (in terms of selling) for the stock/index. The resistance level is always above the current market price. The likelihood of the price rising to the resistance level, consolidating, absorbing all the supply, and declining is high. The resistance is one of the critical technical analysis tools which market participants look at in a rising market. The resistance often acts as a trigger to sell. Here is the chart of Ambuja Cements Limited. The horizontal line coinciding at Rs.215 on the chart, marks the resistance level for Ambuja Cements. I have deliberately compressed the chart to include more data points, the reasons for which I will shortly explain. But before that there are two things that you need to pay attention to while looking at the above chart: The resistance level, indicated by a horizontal line, is higher than the current market price. While the resistance level is at 215, the current candle is at 206.75. The current candle and its corresponding price level are encircled for your reference For a moment let us imagine Ambuja cement at Rs.206 forming a bullish marubuzo with a low of 202. We know this is a signal to initiate a long trade, and we also know that the stop loss for this trade is at 202. With the new-found knowledge on resistance, we now know that we can set 215 as a possible target for this trade! Why 215 you may wonder? The reasons are simple: - 184 CU IDOL SELF LEARNING MATERIAL (SLM)

The resistance of 215 implies there is a likelihood of excess supply. Excess supply builds selling pressure. Selling pressure tends to drag the prices lower. Hence for reasons stated above, when a trader is long, he can look at resistance points to set targets and to set exit points for the trade. The next obvious question is, how do we identify the resistance level? Identifying price points as either a support or resistance is extremely simple. The identification process is the same for both support and resistance. If the current market price is below the identified point, it is called a resistance point; else it is called a support point. Since the process is the same, let us proceed to understand ‘support’, and we will follow it up with the procedure to identify S&R. The Support Having learnt about resistance, understanding the support level should be quite simple and intuitive. As the name suggests, support is something that prevents the price from falling further. The support level is a price point on the chart where the trader expects maximum demand (in terms of buying) coming into the stock/index. Whenever the price falls to the support line, it is likely to bounce back. The support level is always below the current market price. There is a maximum likelihood that the price could fall until the support, consolidate, absorb all the demand, and then start moving upwards. The support is one of the critical technical level market participants look for in a falling market. The support often acts as a trigger to buy. Here is the chart of Cipla Limited. The horizontal line coinciding at 435 on the chart marks the support level for Cipla. The support level, indicated by the horizontal line is below the current market price. While the support level is at 435, the current candle is at 442.5. The current candle and its corresponding price level are encircled for your reference Like we did while understanding resistance, let us imagine a bearish pattern formation – perhaps a shooting star at 442 with a high of 446. Clearly, with a shooting star, the call is too short Cipla at 442, with 446 as the stop loss. Since we know 435 the immediate support, we can set the target at 435. So, what makes Rs.435 target worthy? The following reasons back the decision: Support at 435 implies there is a maximum likely hood of excess demand to emerge. Excess demand builds buying pressure. 185 CU IDOL SELF LEARNING MATERIAL (SLM)

Buying pressure tends to drag the price higher. Hence for the reasons stated above, when a trader is short, he can look at support points to set targets and to set exit points for the trade. 13.7 CHART PATTERNS Chart patterns are an integral aspect of technical analysis, but they require some getting used to before they can be used effectively. To help you get to grips with them, here are 10 chart patterns every trader needs A chart pattern is a shape within a price chart that helps to suggest what prices might do next, based on what they have done in the past. Chart patterns are the basis of technical analysis and require a trader to know exactly what they are looking at, as well as what they are looking for to know. Best Chart Patterns  Head and shoulders  Double top  Double bottom  Rounding bottom  Cup and handle  Wedges  Pennant or flags  Ascending triangle  Descending triangle  Symmetrical triangle There is no one ‘best’ chart pattern, because they are all used to highlight different trends in a huge variety of markets. Often, chart patterns are used in candlestick trading, which makes it slightly easier to see the previous opens and closes of the market. Some patterns are more suited to a volatile market, while others are less so. Some patterns are best used in a bullish market, and others are best used when a market is bearish. It is important to know the ‘best’ chart pattern for your market, as using the wrong one or not knowing which one to use may cause you to miss out on an opportunity to profit. Before getting into the intricacies of different chart patterns, it is important that we briefly explain support and resistance levels. Support refers to the level at which an asset’s price stops falling and bounces back up. Resistance is where the price usually stops rising and dips back down. 186 CU IDOL SELF LEARNING MATERIAL (SLM)

The reason levels of support and resistance appear is because of the balance between buyers and sellers – or demand and supply. When there are more buyers than sellers in a market (or more demand than supply), the price tends to rise. When there are more sellers than buyers (more supply than demand), the price usually falls. As an example, an asset’s price might be rising because demand is outstripping supply. However, the price will eventually reach the maximum that buyers are willing to pay, and demand will decrease at that price level. At this point, buyers might decide to close their positions. This creates resistance, and the price starts to fall toward a level of support as supply begins to outstrip demand as more and more buyers close their positions. Once an asset’s price falls enough, buyers might buy back into the market because the price is now more acceptable – creating a level of support where supply and demand begin to equal out. If the increased buying continues, it will drive the price back up towards a level of resistance as demand begins to increase relative to supply. Once a price breaks through a level of resistance, it may become a level of support. Types of Chart Patterns Chart patterns fall broadly into three categories: continuation patterns, reversal patterns and bilateral patterns. A continuation signals that an ongoing trend will continue Reversal chart patterns indicate that a trend may be about to change direction Bilateral chart patterns let traders know that the price could move either way – meaning the market is highly volatile For all these patterns, you can take a position with CFDs. This is because CFDs enable you to go short as well as long – meaning you can speculate on markets falling as well as rising. You may wish to go short during a bearish reversal or continuation, or long during a bullish reversal or continuation – whether you do so depend on the pattern and the market analysis that you have carried out. Head and Shoulders Head and shoulders are a chart pattern in which a large peak has a slightly smaller peak on either side of it. Traders look at head and shoulders patterns to predict a bullish-to-bearish reversal. Typically, the first and third peak will be smaller than the second, but they will all fall back to the same level of support, otherwise known as the ‘neckline’. Once the third peak has fallen back to the level of support, it is likely that it will breakout into a bearish downtrend. Double Top 187 CU IDOL SELF LEARNING MATERIAL (SLM)

A double top is another pattern those traders use to highlight trend reversals. Typically, an asset’s price will experience a peak, before retracing back to a level of support. It will then climb up once more before reversing back more permanently against the prevailing trend Double Bottom A double bottom chart pattern indicates a period of selling, causing an asset’s price to drop below a level of support. It will then rise to a level of resistance, before dropping again. Finally, the trend will reverse and begin an upward motion as the market becomes more bullish. A double bottom is a bullish reversal pattern because it signifies the end of a downtrend and a shift towards an uptrend. Rounding Bottom A rounding bottom chart pattern can signify a continuation or a reversal. For instance, during an uptrend an asset’s price may fall back slightly before rising once more. This would be a bullish continuation. An example of a bullish reversal rounding bottom – shown below – would be if an asset’s price was in a downward trend and a rounding bottom formed before the trend reversed and entered a bullish uptrend. Cup and Handle The cup and handle pattern are a bullish continuation pattern that is used to show a period of bearish market sentiment before the overall trend finally continues in a bullish motion. The cup appears like a rounding bottom chart pattern, and the handle is like a wedge pattern – which is explained in the next section. Following the rounding bottom, the price of an asset will likely enter a temporary retracement, which is known as the handle because this retracement is confined to two parallel lines on the price graph. The asset will eventually reverse out of the handle and continue with the overall bullish trend. Wedges Wedges form as an asset’s price movements tighten between two sloping trend lines. There are two types of wedges: rising and falling. A rising wedge is represented by a trend line caught between two upwardly slanted lines of support and resistance. In this case the line of support is steeper than the resistance line. This pattern generally signals that an asset’s price will eventually decline more permanently – which is demonstrated when it breaks through the support level. Pennant or Flags 188 CU IDOL SELF LEARNING MATERIAL (SLM)

Pennant patterns, or flags, are created after an asset experiences a period of upward movement, followed by a consolidation. Generally, there will be a significant increase during the early stages of the trend, before it enters a series of smaller upward and downward movements. Pennants can be either bullish or bearish, and they can represent a continuation or a reversal. The above chart is an example of a bullish continuation. In this respect, pennants can be a form of bilateral pattern because they show either continuations or reversals. While a pennant may seem like a wedge pattern or a triangle pattern – explained in the next sections – it is important to note that wedges are narrower than pennants or triangles. Also, wedges differ from pennants because a wedge is always ascending or descending, while a pennant is always horizontal. Ascending Triangle The ascending triangle is a bullish continuation pattern which signifies the continuation of an uptrend. Ascending triangles can be drawn onto charts by placing a horizontal line along the swing highs – the resistance – and then drawing an ascending trend line along the swing lows – the support. Ascending triangles often have two or more identical peak highs which allow for the horizontal line to be drawn. The trend line signifies the overall uptrend of the pattern, while the horizontal line indicates the historic level of resistance for that particular asset. Descending Triangle In contrast, a descending triangle signifies a bearish continuation of a downtrend. Typically, a trader will enter a short position during a descending triangle – possibly with CFDs – in an attempt to profit from a falling market. Descending triangles generally shift lower and break through the support because they are indicative of a market dominated by sellers, meaning that successively lower peaks are likely to be prevalent and unlikely to reverse. Descending triangles can be identified from a horizontal line of support and a downward- sloping line of resistance. Eventually, the trend will break through the support and the downtrend will continue. Symmetrical Triangle The symmetrical triangle pattern can be either bullish or bearish, depending on the market. In either case, it is normally a continuation pattern, which means the market will usually continue in the same direction as the overall trend once the pattern has formed. Symmetrical triangles form when the price converges with a series of lower peaks and higher troughs. In the example below, the overall trend is bearish, but the symmetrical triangle shows us that there has been a brief period of upward reversals. 189 CU IDOL SELF LEARNING MATERIAL (SLM)

All the patterns explained in this article are useful technical indicators which can help you to understand how or why an asset’s price moved in a certain way – and which way it might move in the future. This is because chart patterns are capable of highlighting areas of support and resistance, which can help a trader decide whether they should open a long or short position; or whether they should close out their open positions in the event of a possible trend reversal. 13.8 SUMMARY  Money, money, money! It is all about prices, even in the stock market. A good stock can be loss-making if you buy it at the wrong price. For this you need to know what is a chart?  Technical analysis is all about getting the price right. It even plots market trends using stock prices. All this action, though, happens in a place called ‘stock chart’.  Analysis of market trends is the first tool that is used in technical analysis. However, trend analysis cannot be done unless historical stock charts are available. This is because trends are discovered in the charts themselves. It is, therefore, critical to understand what a chart is and how to perform stock chart analysis to excel at technical analysis.  In this section, we will understand what a chart is and briefly discuss stock charts. We will also understand what trend lines are and how they can be combined with stock charts to make useful deductions about stock prices movements.  Trying to perform technical analysis without using stock charts is like trying to build a house without owning land! So, we must try to understand how to read the charts. But before we get to that, let’s try to answer the question, what is a stock chart?  Put in the simplest possible terms, it is a graphical representation of how a stock’s price or trading volumes have changed over time. This relationship can be presented in several ways, using different types of charts. It is your job, as a technical analyst, to identify the type that will bring out a hidden trend most effectively.  Stock charts, like all other charts, have two axes—the vertical axis and the horizontal axis. The horizontal axis represents the historical time periods for which a technical chart has been constructed. The vertical axis displays the stock price or the trading volume corresponding to each period.  There are many types of charts that are used for technical analysis. However, the four types that are most common are—line chart, bar chart, point and figure chart and candlestick chart. We will discuss these technical charts extensively later. However, we have illustrated three types of stock charts below. The bar chart looks a lot like the candlestick chart. All the charts displayed below are stock price charts. The nature of 190 CU IDOL SELF LEARNING MATERIAL (SLM)

the input may, however, must be altered when you move from one chart type to another.  Now that you are familiar with the different types of charts, the next thing you want to understand is how to read them. Before doing so, though, let us look at trend lines and trend lengths – the principal tools used for the analysis of technical charts. Let’s look at them individually:  A trend line is a straight line that connects all the tops or bottoms in stock charts with each other. We touched upon trend lines in one of the previous sections. Here, we concern ourselves more with their utility. Trend lines are essential because trends are sometimes not so-clearly visible in technical charts. How often we see zigzag patches! They make stock analysis tricky.  To reduce this distortion, an external aid must be used. Take the example of the line chart we saw earlier. We have reproduced it below with a few additional touches. Look at the section that has been highlighted. At the outset, there is no clear reason to say whether the price trend is upwards or downwards. Tops and bottoms in this section are not clearly going higher or lower conclusively. How, then, will you go about your chart analysis here? Using trend lines may prove helpful as they may be able to cut through the confusion here. We have done just this.  Since trend lines are straight lines, they smooth out the ‘waviness’ in the charts and accentuate the trends hidden in the stock chart.  These above charts, we have used two trend lines – one each for tops and bottoms respectively. The use of trend lines in a combination like this is called a channel. It helps us understand whether the trend is upwards or downwards. Cast your mind back to our conversation about market trends. Recall that a stable uptrend, for example, is marked not only by increasing tops, but also increasing bottoms. By using a single trend line, you will only be able to comment about one of these. To spot a trend, you must use a combination of trend lines. In other words, draw a channel.  When analyzing technical charts, it is important to not only spot trends, but also predict the length of these trends. We discussed this in the section on market trends. We acknowledged that primary trends are the longest lasting and bring about the most radical movement in stock prices. A decisive move in a stock price, for a sustained period will only come if the trend is strong and enduring. Minor trends and, in some cases even secondary trends, are unable to cause such a meaningful impact. They may only pass off as a flash in the pan. The longevity of a stock trend can be predicted by using patterns in the charts. One can start off with an analysis of trend lines themselves. If trend lines suggest that each time the stock price rises to a higher level before falling, it is suggestive of an uptrend. However, the trend is confirmed only if simultaneously, the falls are also smaller. Some of the other measures to assess the 191 CU IDOL SELF LEARNING MATERIAL (SLM)

longevity and conviction in technical charts are head and shoulders, inverse head and shoulders and double tops and double bottoms.  As we discussed in the previous section, there are four types of stock charts that are principally used in technical analysis.  A line chart is the figure that, perhaps, automatically comes to mind when you think of a chart. The line chart has the stock price or trading volume information on the vertical or y-axis and the corresponding time on the horizontal or x-axis). Trading volumes refer to the number of stocks of a company that were bought and sold in the market on a particular day. The closing stock price is commonly used for the construction of a line chart.  Once the two axes have been labelled, preparation of a line chart is a two-step process. In the first step, you take a particular date and plot the closing stock price as on that date on the graph. For this, you’ll put a dot on the chart in such a way that it is above the concerned date and alongside the corresponding stock price.  Let’s suppose that the closing stock price on December 31, 2014, was Rs 120. For plotting it, you’ll put a dot in such a way that it is simultaneously above the marking for that date on the x-axis, and alongside the mark that says Rs 120 on the y-axis. You will do this for all dates. In the second step, you will connect all the dots plotted with a line. That’s it! You have your line chart.  A bar chart is like a line chart. However, it is much more informative. Instead of a dot, each marking on a bar chart is in the shape of a vertical line with two horizontal lines protruding out of it, on either side. The top end of each vertical line signifies the highest price the stock traded at during a day while the bottom point signifies the lowest price at which it traded at during a day. The horizontal line to the left signifies the price at which the stock opened the trading day. The one on the right signifies the price at which it closed the trading day. As such, each mark on a bar chart tells you four things. An illustration of the marks used on a bar chart is given below  A bar chart is more advantageous than a line chart because in addition to prices, it also reflects price volatility. Charts that show what kind of trading happened that day are called Intraday charts. The longer a line is, the higher is the difference between opening and closing prices. This means higher volatility. You should be interested in knowing about volatility because high volatility means high risk. After all, how comfortable would you be about investing in a stock  Candlestick charts give the same information as bar charts. They only offer it in a better way. Like a bar chart is made up of different vertical lines, a candlestick chart is made up of rectangular blocks with lines coming out of it on both sides. The line at the upper end signifies the day’s highest trading price. The line at the lower end 192 CU IDOL SELF LEARNING MATERIAL (SLM)

signifies the day’s lowest trading price. The day’s trading can be shown in Intraday charts. As for the block itself (called the body), the upper and the lower ends signify the day’s opening and closing price. The one that is higher of the two, is at the top, while the other one is at the bottom of the body.  What makes candlestick charts an improvement over bar charts is that they give information about volatility throughout the period under consideration. Bar charts only display volatility that occurs within each trading day. Candles on a candlestick chart are of two shades-light and dark. On days when the opening price was greater than the closing price, they are of a lighter shade (normally white). On days when the closing price was higher than the opening price, they are of a darker shade (normally black). A single day’s trading is represented by Intraday charts. Higher the variation in colour, more volatile was the price during the period. The appearance of candles on a candlestick.  A point and figure chart bears no resemblance with the other three kinds of charts discussed above. It was used extensively before the introduction of computers to stock analysis. These days, however, it is used by a very limited number of people. This is chiefly because it is complex to understand and provides limited information. A point and figure chart essentially display the volatility in a stock’s price over a chosen period. On the vertical axis, it displays the number of times stock prices rose or fell to a particular extent. On the horizontal axis, it marks time intervals. Markings on the chart are exclusively in the form of X’s and O’s. X’s represent the number of times the stock rose by the specified limit, while O’s represent the number of times it fell by it. The specified amount used is called box size. It is directly related to the difference between markings on the y-axis. 13.9 KEYWORDS  Ascending Triangle: The ascending triangle is a bullish ‘continuation’ chart pattern that signifies a breakout is likely where the triangle lines converge. To draw this pattern, you need to place a horizontal line (the resistance line) on the resistance points and draw an ascending line (the uptrend line) along the support points.  Descending Triangle: Unlike ascending triangles, the descending triangle represents a bearish market downtrend. The support line is horizontal, and the resistance line is descending, signifying the possibility of a downward breakout.  Symmetrical Triangle: For symmetrical triangles, two trend lines start to meet which signifies a breakout in either direction. The support line is drawn with an upward trend, and the resistance line is drawn with a downward trend. Even though the breakout can happen in either direction, it often follows the general trend of the market. 193 CU IDOL SELF LEARNING MATERIAL (SLM)

 Pennant: Pennants are represented by two lines that meet at a set point. They are often formed after strong upward or downward moves where traders pause, and the price consolidates before the trend continues in the same direction.  Flag: The flag stock chart pattern is shaped as a sloping rectangle, where the support and resistance lines run parallel until there is a breakout. The breakout is usually the opposite direction of the trendlines, meaning this is a reversal pattern. Learn more about breakout stock patterns. 13.10 LEARNING ACTIVITY 1. Now that you are familiar with the different types of charts, the next thing you want to understand is how to read them. Before doing so, though, let us look at trend lines and trend lengths – the principal tools used for the analysis of technical charts. What are trend line and trend length and their roles? ___________________________________________________________________________ ___________________________________________________________________________ 2. A chart is a graphical representation of price and volume movements of a stock over a certain period. In the graphical chart, the X-axis represents the time, and the Y-axis represents the price movement. What is a Stock Chart? ___________________________________________________________________________ ___________________________________________________________________________ 13.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Which of the following contains a real body? 2. When a rising wedge appears in a down trend it is seen 4as? 3. Which of the following describe the Head & Shoulder pattern? 4. Which of the following is true of a rising wedge pattern? 5. Which of the following is not a part of the candlestick pattern? Long Questions 1. How can technical analysis patterns be explained? 2. Do specified Moving Average and Bollinger Band parameters help a better prediction in technical analysis? 194 CU IDOL SELF LEARNING MATERIAL (SLM)

3. Does fundamental or technical analysis provide better knowledge for investing in securities? 4. Is there any specific combination of Moving averages that can give better results in stock trading? 5. Are Big Data database technologies already used to improve fundamental and technical analysis? B. Multiple choice Questions 1. How is the market value of the scrip determined? a. The dividend declared by the company b. The present status of the stock market c. The number of floating shares d. The interaction of demand and supply 2. Identify a right option for the following: We can compare the price-earnings ratio of a market to its historical average to make judgment about, whether the market is: - a. Under valued b. Over valued c. Both (A) and (B) d. None of these 3. What do the Chartist believe about charts? a. Spot the current trend for buying and selling b. Indicates the future action to be taken c. Shows the past historic movement d. All of these 4. Identify the right option for the following: A basic assumption of technical analysis in contrast to fundamental analysis is that a a. Stock's price will approach its intrinsic value over time b. Security prices move in patterns, which repeat over long periods c. Financial statements provide information crucial in valuing a stock d. The stock marketis inefficient 5. What does the conventional technical analysis emphasize on? 195 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Only the aggregate stock market b. Either the aggregate stock market or individual stocks c. Only individual stocks d. Only corporate securities Answers 1-d, 2-b, 3-d, 4-b, 5-b 13.12 REFERENCES References  Livingston, D, K.(14 June 2019). How to Read Stock Charts: Technical Analysis for Beginners, Including Moving Average Trading. Independently Published.  TV18, CNBC. (1 December 2012). Technical Analysis Trading Making Money With Charts - Gujarati. Network 18 Publications.  Schwager, Jack, D. (February 4, 1999). Getting Started in Technical Analysis. Wiley; 1st edition. Textbooks  Pring, Martin. (January 8, 2014). Technical Analysis Explained, Fifth Edition: The Successful Investor's Guide to Spotting Investment Trends and Turning Points. McGraw-Hill Education; 5th edition.  Murphy, John, J. (January 4, 1999). Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications SUB UPD EX Edition. New York Institute of Finance; SUB UPD EX edition.  O'Neil, William. (June 8, 2009). How to Make Money in Stocks: A Winning System in Good Times and Bad, Fourth Edition. McGraw-Hill Education. Websites  https://www.investopedia.com/articles/personal-finance/090916/top-5-books-learn- technical-analysis.asp  https://www.investors.com/how-to-invest/stock-chart-reading-for-beginners/  https://school.stockcharts.com/doku.php?id=chart_analysis:pnf_charts:pnf_basics 196 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 14 BREADTH INDICATORS STRUCTURE 14.0 Learning Objectives 14.1 Introduction 14.2 Breadth Indicators 14.2.1 AD Line 14.2.2 Highs and Lows 14.3 Volume Sentiment Indicators 14.3.1 Short Interest Ratio 14.3.2 Mutual Fund Liquidity 14.3.3 Put Call Ratio 14.3.4 TRIN 14.4 Summary 14.5 Keywords 14.6 Learning Activity 14.7Unit End Questions 14.8 References 14.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  Explain the concepts of market-breadth analysis to forecast potential tops and bottoms in the market.  Identify and differentiate between breadth data and its operations.  Illustrate breadth differences, ratio, and line indicators. 14.1 INTRODUCTION Breadth indicators help traders and investors gauge the overall view of the market. The movement in the stock market is examined by using stock indexes. For example, the Nifty 50 Advance/Decline Line is a cumulative guide that helps us in understanding whether more stocks are rising or falling over time. This calculation helps us in analyzing the overall investor sentiment in all the stocks within the index. 197 CU IDOL SELF LEARNING MATERIAL (SLM)

Breadth Indicators are mainly used for two purposes: Market Sentiment: These indicators can help us in determining if the ongoing trend of the market is going to reverse. Trend Strength: Breadth indicators can also help us in determining the strength of a bullish or bearish trend. 14 Breadth Indicators that Trader should know: Below is the list of 15 Breadth Indicators that Trader should know to understand the stock market sentiment: 1. Breadth Line Breadth line is also known as the Advance/Decline line which is one of the best ways of measuring market internal strength. This line is the cumulative sum of advances minus decline. The formula for the same is shown below: Breadth Line Value= (No. of Advance Stocks – No of Decline Stocks) + Breadth Line Value of the Previous day. When the number of advance stocks exceeds the number of the decline stocks then the breadth line will rise and vice versa. When the stock market average is rising but the breadth line is not rising then negative divergence occurs which means that only few stocks are participating in the move and traders should be cautious when trading in the index. 2. McClellan Oscillator McClellan Oscillator is the difference between two exponential moving averages of advance and declines. The two averages are 19 days EMA and 30 days EMA. The positive and negative values of this indicator indicate whether more stocks are advancing or declining. The indicator is positive when the 19-day EMA is above the 39-day EMA, and negative when the 19-day EMA is below the 39-day EMA. This indicator usually oscillates between the range of +100/+150 or -100/-150. This oscillator can also be used to spot negative and positive divergences. 3. McClellan Ratio-Adjusted Oscillator As Mcclellan found out that the advance and decline alone can be influenced by the total number of issues traded, he developed the Mcclellan Ratio-Adjusted Oscillator. Mcclellan Ratio-Adjusted Oscillator is the ratio of net of advances minus decline divided by total number of issues traded. 198 CU IDOL SELF LEARNING MATERIAL (SLM)

The ratio is multiplied by 100 to make it easier to read. 4. McClellan Summation Index This summation index is the area under the Mcclellan Ratio-Adjusted Oscillator. The McClellan summation has multiple interpretations, and it is considered neutral at a reading of +1,000. During the 1960s, the McClellan Summation Index generally stayed within the bounds of 0 and +2,000. The interpretation of this indicator is almost the same as the Mcclellan Ratio-Adjusted Oscillator. 5. Breadth Thrust Thrust is when the deviation from the norm is sufficiently large to be identified and when that deviation signals either the end of an old trend or beginning of the new trend. One of the indicators to analyse breadth thrust was developed by Mark Zweig which calculates a 10-day Simple Moving Average of Advances divided by sum of Advances and Declines. 6. Advance- Decline Ratio The advance-decline ratio refers to the number of advancing shares divided by the number of declining shares. The advance-decline ratio can be used for various timeframes, such as one day, one week or one month. On a standalone basis, this indicator indicates whether the market is overbought or oversold. 7. ARMS Index ARMS Index also known as TRIN and MKDS is one of the popular up and low volume indicators. Up Volume is the volume traded in all advancing stocks and down volume is the volume traded in all declining stocks which is another way of gauging market strength. When a large amount of down volume occurs then the market is at or close to bottom and when a large amount of up volume occurs then the market is at or close to top. This indicator is calculated as Advance/Decline divided by Up Volume/Down Volume, and it has an inverse relationship with the market prices. 8. Net New High and Net New Lows Net New 52-Week Highs is a simple breadth indicator which is calculated by subtracting new lows from new highs. 199 CU IDOL SELF LEARNING MATERIAL (SLM)

“New lows” is the number of stocks recording new 52-week lows and “New highs” is the number of stocks making new 52-week highs. This indicator provides help in gauging the internal strength or weakness in the market. It indicates that there are more new highs when the indicator is positive. On the other hand, there are more new lows when the indicator is negative. 9. New High Vs New Lows This is the simplest indicator which suggests buying when the number of new highs exceeds the number of new lows daily. On the other hand, one should sell when the number of new lows exceeds the number of new highs daily. 10. Plurality Index Plurality Index is calculated as the 25-day sum of the absolute difference between the advances and declines and it is always a positive number.High numbers in the plurality index suggest impending bottom and lower High numbers in the plurality index suggest impending top. 11. 90% Downside Days This indicator is a reliable measure for identifying stock market bottoms which uses daily upside and downside volume and daily points gained and lost. A 90% downside day occurs when on a particular day the percentage of the downside volume exceeds the total of upside and downside volume by 90% and percentage of downside points exceeds the total of gained points and lost points by 90%. 12. Absolute Breadth Index This is a breadth indicator which is calculated by taking the absolute difference between the advances and declining stocks. Usually, large numbers suggest volatility is increasing, which indicates significant changes in stock prices in the coming weeks. 13. High-Low Logic Index The high-low index compares stocks which are reaching their 52-week highs with stocks that are hitting their 52-week lows. The high-low index is mainly used by investors and traders for confirming the prevailing market trend of a broad market index. 14. Ticks Index 200 CU IDOL SELF LEARNING MATERIAL (SLM)