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Chartered Market Technician Level 1Authors- Kirkpatrick, Charles D. and Dahlquist, Julie R

Book Name-Technical Analysis - The Complete Resource for Financial Market Technicians

Definition:The art of Technical Analysis- for it is an ART- is to identifyTrend changes at an early stage and to maintain an Investment position until the weight of the evidence indicatesThat the trend has reversed..(page 9)TREND LINES- Join Extreme Points

Higher Top and Higher Bottom also called as Higher Highs and Higher Lows

Lower Top and Lower Bottom also called as Lower Highs and Lower Lows

Trends develops from Price and - Price develops from SUPPLY AND DEMAND

Example of Fruit market---Bhav Bhagwan HaiTrend can be of varied Lengths, one hour trend, one week trend, one month trend, one year trend, five year trend and so on..

People look trends as per their requirements/trading styles, or interest

But whatever may be the trend length, the method of identifying the trend remains the same

This characteristics of trend to act same in any period is called as FRACTAL nature of trends. Fractal means trends are analyzed in the same way, in any time frame(refer pg 15)

Check Trends of different time frames to get overviewTypes of Trends:Primary Trend measured in months or yearsSecondary or Intermediate Trend measured in weeks or monthsShort term Trend measured in daysIntraday Trend measured in minutes or hoursAssumptions of Technical Analysis: Pg 17Price is determined by interaction of demand and supplyPrice discounts everything (Averages)Prices are non random (Means Random walk theory is false)History repeats itselfPatterns are fractalEmotions are affected by earlier Emotions (ex- Bubbles and Panics, saw in 2007-08)

Father of Technical Analysis- Mr. Charles Dow (1851-1992)On July 3, 1884 Dow publishes first index, total of 11 stocks, 9 railroads and 2 industrials stocksLater on focused more on IndustrialsLater on May 26, 1896 launched DOW JONES INDUSTRIAL AVERAGE (DJIA), in the Wall Street Journal, which covered 12 stocksDJIA now have 30 stocks (remains price weighted)Known for his Rail road average and Industrials average (refer pg 26)

Chap 4 (pg 33.)Random Walk Theory- Says Prices are Random, and it opposes Technical'sEfficient Market Hypothesis Everything is already priced in the market, but no one can beat the marketDRAWDOWNS- Period of successive losses are referred as Drawdowns. For example market is down 3%, 4% and 3% continuously 3 days or more than that.

Criticisms of Technical Analysis:(Pg No 50 bottom)Technical only for short term trader, and not long term: This is false, as long term prices are also developed by Peoples sentiments. Ex, HUL head and shoulder, Satyam head and shoulderTechnical will fail if all investors practice it: This is been around from more than 100 years, and still going well. Even fundamental principles of Diversification did not work in 2008 crises, when all non correlated assets came down. Of course some technical principles may not work after some time, it has to be modified, but technical's have proved to be working till date, with proper risk management tools.Most technical rules require subjective judgment: Even fundamentals one analyst will give buy and another sell or hold. So nothing can be perfect

Chapter 5, (pg. 57)For using technical analysis, you need: Easy access, Fungibility, sufficient liquidity, and continuous tradingFungibility means if an asset is traded on 2 or more exchanges, you can buy on 1 exchange and sell on another (so if you buy in BSE, and sell in NSE, its fine)Read the rest of the theory about cash, forwards, futures, options etc Three types of players: pg (68 bottom)Informed Players- These players interpret new information rationally and the market price is adjusted to its equilibrium. Ex. Hedge fund managers, Insiders, etcNoise Players- It is a term given by Fisher Black and means random activity around the equilibrium price. These are also called as uninformed players or public players, and most of the mutual fund managers, pension fund managers or technical analyst, or normal retail investors belong to this category.Liquidity Players- Who invests or sells huge quantity may be due to need of funds, or due to compulsion, ex LIC in India, or any big Mutual fund, etcHow is market measured ?Market is measured by Index, which gives the overall viewIndex may comprise of stocks from various sectors, to highlight the overall economyThree major types of index construction: Price weighted average, Market capitalization weighted average and Equally weighted which is also called as Unweighted average.Price weighted average- The average of daily change in price is taken, and average is found out. Then the average is compared with the previous days average, and percentage change is seen. Very easy to calculate, but the problem is that high priced stock have more influence in index, than low priced stock. Ex. Dow Jones Industrial Average Market capitalization weighted average- In this method, not only prices but also outstanding shares is taken of. It is calculated by multiplying prices in to number of outstanding shares, and then average is taken. Ex- S&P 500, NYSE, NASDAQ, etcAlso, some index follows Free Float market cap method. Free float means only those shares which are traded in the market are taken in to calculation. Those shares which are locked up with promoters, or employees, etc are not counted as they are not available for trading.Hence, free float market cap is calculated by multiplying price of share in to free float outstanding shares.However, even in this method stock with higher market cap and higher prices affect the index calculation inappropriately.Equally Weighted Average- Take total percentage change in each stock divided by total no of stocks. Ex, Value line averages

Chapter 6 Dow Theory (Read it full)Charles H. Dow is known as the Father of Modern day Technical AnalysisHe is the founder and first editor of the WALL STREET Journal.Charles Dow did not write Dow Theory. He used to regularly write articles in his journal, which later were organized and put together to be stated as Dow Theory.The term DOW THEORY was first used by A.C Nelson in his writings.Robert Rhea wrote a book on Dow theory and wrote about 3 main hypothesis on Dow theory.

3 Hypothesis of Dow Theory:The Primary Trend is inviolate: It means that the primary or long term trend cannot be manipulated. Though minor or secondary trend may be manipulated, Primary trend or long term trend cannot be manipulated.The averages discount everything: By studying the average of the sector, one can find out the possible future direction, as it discounts everything. Dow Theory is not infallible: It means that Dow Theory works and it is not wrong. Dow Theory Theorems:Ideal market picture consists of Uptrend, Top, Downtrend and Bottom.Economic rationale should be used to explain stock market action- For example two averages should confirm each other.Dow theory says that prices TREND. It is one of the ways how technical analyst can profit. RIDE the TREND.First one is Primary trend which can be big upward trend or downward trend which is also known as Bull run or Bear run.Second one is Secondary Trend, or Secondary Reaction, which is an important DECLINE in a primary bull market, or RALLY in a primary bear market. These are from 3 weeks to as many months.Final one is the minor movements which are daily fluctuations and nothing much.Dow introduced the concept of CONFIRMATION. It means if you saw a breakout in Industrials, it should be followed by Breakout in Rail road average soon.New modern day confirmation is seen by looking at Standard & Poors 500 and Russell 2000. When these 2 indexes confirm each other, it confirms the Primary Trend.Volume must confirm the trend. Market in downtrend must have high volumes when goes down, and less volumes when rise. Similarly, when market is in uptrend, it must have high volumes when it goes up, and low volumes when correct.Criticisms of Dow Theory:Delay in knowing Price Reversal: Investor would act after rather than before at market tops or bottoms, as theory says that trend reversal not confirmed unless confirmation comes.Trends not defined: Different trends do not have any definitive period assigned, and so confusion. Its difficult to determine trend, as sometimes secondary trend beginning would look like Primary trend beginning.

Chapter 8: Market StrengthMARKET MAI KITNA DUM HAI,

YA

KITNA GUM HAIWhat is Oscillator ?Oscillator are indicators shown at the bottom of the price chart, which shows the overbought and oversold zone.

The oscillators moves mostly in a range of the overbought and oversold region.

So some oscillators have a particular range in which it moves, and some are open ended.

Normally its time to sell once oscillator reaches overbought region, and its time to buy when oscillator reaches oversold region.

Concept of Divergence:When the trend is not confirmed with the indicator or oscillator, we call this as concept of Divergence.

If the price is going up, and the indicator is showing downside, it is negative divergence, and it means the price can reverse from top now.

If the price is going down, and the indicator is not going down, it is positive divergence, and it means the price can reverse from bottom now.

You can also check volumes with the trend, whether volumes showing upward strength when prices are moving up and vice versa.

Another form of Reversal is called Positive Reversal and Negative Reversal as said by Constance Brown.Positive Reversal occurs when the price is not making new low, but the oscillator makes a new low (Bullish)Negative Reversal occurs when the price is not making new high, but oscillator is making new high (Bearish)

Positive divergenceMarket Breadth IndicatorsAdvance means a stock have increased today with respect to yesterdays close, or today's closing is higher than previous days close.Decline means a stock have decreased today with respect to yesterdays close, or todays closing is lower than previous days close.Unchanged means the stock is at same levels as yesterdays closing.We will see various indicators which uses the above points to measure the strength of the market as a whole.Concept of Double Negative DivergenceWhen you see 2 consecutive Negative breadth divergences, with respect to market average, it is called DOUBLE NEGATIVE divergence, according to James Hughes.

BREADTH DIFFERENCES INDICATORSThe Breadth Line or Advance-Decline LineBreadth Line is the cumulative sum of the advance minus declines.Suppose DAY 1, out of 100 we have 80 Advance and 20 Decline, Breadth line will start with 60. Next day suppose, Advance is 90 and Decline is 10, we have 80. So, breadth line will be formed by adding the previous 60 and 80 = 140.So breadth line will increase when Advances are more than Declines, and it will decrease when Declines are more than Advances.It can be used as a confirmation with the market averages or index. If the index is rising, it should be confirmed with rise in Breadth Line.If suppose the advance decline line is falling, but the stock market index/average is rising, it means that the rally is being taken by only few stocks, and majority of stocks are declining, so it shows a divergence.Take only Breadth of operating stocks like Nifty50, Nifty 100, BSE 100, etcAdvance Decline Line Moving Average:You have to calculate a certain day moving average of both Index or Market and Breadth Line.Lets say you calculate a 30 day moving average of both index and breadth line, so if the index and breadth line are above their moving averages, the market is a buy, and vice versa.

Advance-Decline Line to its 32 week Simple Moving Average (SMA)Ned Davis research founded this concept in US.It uses a ratio of NYSE Advance Decline Line to its 32 week SMA.So, ratio is = NYSE ADV DEC LINE 32 WEEK SMAWhen the ratio is greater than 1.04, markets have gone up by 19.3% p.aWhen the ratio is less than 0.97, markets have declined by around 11.2% p.aHaurlan IndexUsed Daily advance minus declines data, and on the data used EMA of various time periods like 3 days, 20 days, 200 days.3 days was used for minor trend, 20 days for intermediate, and 200 day for primary trend.He had certain prefixed levels to buy and sell. It was + / - 200 for 20 day M.avg, and +/ - 550 for 200 day M.avg. So whenever EMA crossed above the upper limit, buy was generated, and vice versa.Concept of Equity Line:An equity line is the graph which shows your profit and loss made in trading.When you make profits, the percentage increase is shown and the line goes up, and vice versaIt starts with a zero line, that is where you start trading, and it would go up or down depending on your profitability of tradesIt can be of any duration, 1 day, 5 day, 1 month, 12 months, etcIt shows the success of your trading system, and below zero line means you are in loss.

Profitable equity lineMcClellan OscillatorFound by Sherman and Marian McClellan in 1969.It also uses data of Advance Decline.After taking data, difference between 2 EMA is taken, that is 19 day and 39 day.The oscillator moves from + 100/+150 and 100/-150, where the first one is overbought, and second one is oversold.McClellan Ratio Adjusted Oscillator:In the last oscillator we take only advance decline, so it can be a influenced if number of issues traded is changed.So, to take care of this problem, this ratio adjusted oscillator was found.Hence, this ratio is the advance decline divided by total no issues.This ratio is then multiplied by 1000 to make it easier to read.This is then smoothened with EMA of 19 and 39 days as done in earlier one, with +/- 35 being the overbought and oversold levels.If the EMA crosses the oversold level from above, sell was given, and if it crosses overbought from bottom, buy was given, as McClellan observed that after reaching overbought region, EMA can correct a bit and again break the top, and buy gets generated.McClellan Summation IndexIt is calculated by taking summation of figures got by earlier McClellan oscillator.Here he observed the Overbought and oversold region as 2000 to 0 levels, and 1000 acting as neutral levels.The same index when taken for McClellan Ratio adjusted Index, they got +500 and -500 as overbought and oversold regions respectively.Failure to go above overbought shows, market is topping, and reversal expected.Plurality IndexIt takes 25 day sum of the Absolute figures of Advances DeclinesSince it takes the absolute change, the number is always positive.Stock market have tendency to fall rapidly and rise slowly, hence higher Absolute number means market is nearing bottom, and low number means market is nearing top, and reversal may follow soon.Absolute Breadth IndexJust like McClellan uses Net difference between advances and decline divided by total issues traded, in Absolute Breadth Index, we take Absolute Difference of Advance Decline divided by total issues traded.Hence, the index is always a positive number.

Unchanged Issues IndexIt is the ratio of Unchanged stocks to total number of stocks traded.It just gives you an indication of directional movement when the number of unchanged declines, and nothing more.BREADTH RATIOSAdvance Decline RatioThis ratio is determined by dividing the number of Advances / by number of Declines.

Breath ThrustA THRUST is a deviation which is huge, from being a normal, and which signals a beginning of a new trend.According to Martin Zweig It is calculated by taking moving average of No of advances Divided by Total no of stocks, so buy and sell signals are given when M.avg crosses certain points up and down.UP AND DOWN VOLUME INDICATORThe Arms IndexIt is developed by Richard Arms, Jr.It is also known as TRIN or MKDS.It measures the relative volume in advancing stocks versus declining stocks.When huge volume in declining stocks occurs, markets are near bottom or will see bottom soon, and good volumes in advancing stocks is a healthy sign for markets.Arms index is calculated by two ratios, that is taking advance/declines DIVIDED by up volume/down volume.When ARMS index is high, it means no of advancing stocks are with low volumes, and have no strength.So Arms index above 1 is bearish signal, and below 1 is bullish.

Ninety Percent Downside Days (NPDD)Ninety percent downside days occur when on a particular day, the percentage of 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%.10 to 1 Up volume days and9 to 1 Down volume daysDaily Upside volume is more than 10 times downside volume in 10 to 1 Up Volume DaysDaily Downside volume is more than 9 times the upside volume in 9 to 1 Down Volume DaysAfter this both occurs, market normally is up in the coming 6 monthsHence, this both indicator shows bottom is around, and bounce can now be expectedNEW HIGH AND NEW LOW INDICATORNew High Versus New LowsVery useful and easy to use indicatorBuy when number of new highs exceeds number of new lowsSell when number of new lows exceeds number of new highsThey generally peak before the market peaks, and can give you negative divergence signals at the topHigh Low Logic IndexIt takes in to account lesser of the following two ratios: The number of weekly new highs to total issues OR The number of weekly new lows to total issuesLow index levels tend to suggest a trending marketIt means either a less number of new highs or new lows are being registeredHindenburg OmenIt signals a market reversal downside and has various factors to be seen:52 week highs and lows are greater than 2.2% of total issuesMcClellan oscillator is negativeNew highs cannot be more than two times the number of new lowsConfirmation occursUSING MOVING AVERAGESOne way is to see the number of stocks above or below their 30 week moving averagesIt says, that when the percentage of stocks above their 30 week moving average, reaches above 70% of the total stocks, the market is overbought, and now ready for correctionIn simple words, Out of 100 stocks, 70 stocks are trading above their 30 day moving average its time for correctionSimilarly, Out of 100 stocks, when less than 30 stocks are below their 30 day moving average, the market is at bottom, and now it may go up.The 80/60 Rule:When the percentage of stocks above 30 day moving average is greater than 80%, and when it declines below 60%, it is seen that it will go down to 30%So, a serious decline is coming in markets if this happens, and this have been successful in the past.Chapter 9. Temporal Patterns And CyclesMr. EDWARD DEWEY----FOUNDER OF CYCLES55Periods Longer than Four YearsKondratieff Waves, or K-WavesNicolas Kondratieff, developed Kondratieff waves which is a 50 to 60 year cycleThese waves arise due to change in innovation in product, services, technology, new business formsA new K wave in an economy results in next global leadership of that economyK waves may start with a big warEach K wave effects the structure of the world economy, e.g. Technology in US, and outsourcing in India which leads to 60% GDP to service sector in IndiaRise and fall of world powers depends on the K waveAfter 1930 depression in US, 50-60 years hence comes to 1980-90, so this should have been a downfall , but US did well in late 1990sSo a concept of Double K waves came in to the picture, which sees wave getting over by 2026 in USA34 Year Historical CyclesThe 34 Year cycle is split in to 17 years eachFirst 17 years is dormancy, i.e. consolidation, followed by next 17 years which is a bull runDecennial PatternEdgar smith presented a concept of 10 year cycle, which is also referred as 120 month cyclePattern which is seen every 10 years is called as Decennial PatternHe also found that years ending with 3, 7 and 10 are often down years (bears), and years ending with 5, 8 and 9 are advancing years (bulls)Fifth year advance, that is market going up in years ending with 5, have been successful 100% in last 100 years in US stock marketsPeriods of Four Years or LessFour Year or Presidential CycleWesley Mitchell founded 40 month cycle period, which is approx 4 year cycle

He discovered that US economy suffered recession every 4 years from 1796 to 1923

Today 4 year cycle, taken from price bottom to price bottom, is widely accepted globally

All the cycles are measured from Bottom to Bottom

Some analysts says that since the Presidential election are every 4 years, the cycle is effected every 4 years

This is often therefore called as Presidential Cycle

The 4 year cycle is globally seen, and accepted

In the US Presidential Cycle, markets have rose in the last 2 years of administration, and have been less bullish in the first 2 years of President cycle

The reason may be that the Political party wants to be in good light in its last 2 years of operations

Also the ruling party tries to stimulate the economy by reducing interest rates, which again is boon for markets

Seasonal PatternsInterest rates have seasonal tendency

Long term Interest Rates on bond market in US, have seen a seasonal pattern

Interest Rates usually Decline in summer, and tend to Rise in winter

In Oil, best performance months are July to September, and weakest is usually October

Concept of Entry date/ Exit date trading, which means seasonal entry can be made at particular date and exited at particular date, example Paint stocks in India

SELL IN MAY AND GO AWAY, is famous seasonal tendency, which says that you should sell your holdings from May to September, and enter back in October till April

January SignalsJanuary BarometerJanuary Barometer says that if the market is up in January, the rest of the year would be bullish

So, its said that As the Standard and Poors goes in January, so goes the year.

Normally all other global markets tend to perform well, if Jan month is good.January EffectJanuary Effect says that normally in January small cap stocks tend to outperform the market

It is said to get the tax benefits, investor tend to sell stocks in Nov-Dec, and buy it in JanEVENT TRADINGEvent trading may be done on some news announcement, results announcement, or any holiday occurrenceThere is a pattern called as Independence Day PatternIt is seen that stock market performance is bullish 5 days before the Independence day, and bearish 5 days after the Independence dayHowever, 6th day is a strong market dayAlso 2 weeks before the Thanks giving day is positiveChapter 10. Flow of FundsMore money or liquidity in market = Shares go upLess money or liquidity in market = Shares go down as people sell shares to get liquidityWhen Markets are not good, funds go in to money market mutual fund, and when markets are good funds flow from money market mutual fund to stock marketsHence its important to see how much funds are available in money market mutual fundIf there is more money available in money market mutual fund, it means markets may move up in some time, and if there is less money available in money market mutual fund, it means market may decline as liquidity is not availableNot much of use, it just shows condition of liquidityConcept of Margin Debt- It is the amount of funds that customers at brokerage houses borrow for putting in to stock marketsIt shows that lot of small people are borrowing funds to put it in marketsIt is said that when the margin debt increases considerably, its time for market being at top, and correction may comeConcept of Secondary offerings- It means the company which is already listed comes out with more issue of shares to the public, which means the total no of outstanding shares would increaseSo, when the secondary offering is done, the no of shares in the market increase, so that means SUPPLY increases, so when supply increase prices go downLIQUID Assets- are those which can be sold and converted in to cash easily, like stocks, U.S Treasuries, bank deposits, money market mutual fund, etcAnd non liquid means those which cannot be easily sold and converted in to cash easily like real estate, pension funds, etcWhen household liquidity is high, it is good for stock markets and vice versaHousehold may be corporates or governmentSo, a ratio of Liquid financial assets to Total assets show how Liquid Households are, means how easily can their investments can be converted in to cashSo higher liquid assets- good for marketsMoney Supply Measurement by FED- It measures the money supply by taking in to account M1 and M2M1 has most liquid assets in the financial systemM2 has other less liquid savings assetsMost important to see is M2, as it shows that how much money apart from stock market is parked in this liquid assetsWhen M2 is measured relative to the total market value of stocks, it tells us the percentage of money available outside stock marketA high percentage means, there is plenty money outside stock market, which potentially can come in to stock markets in coming times

Bank Loans- When demand for loans increases in an economy, the interest rates may go up, as there is huge demand for moneyIt is seen that when the interest rates rises, stock market tends to declineAnd when the interest rates declines, stock markets tend to perform goodLong term interest rates and bond prices have inverse relationshipWhen Long term interest rates rises, bond prices fall, and when long term interest rates fall, bond prices risesWhen Long term interest rates increase, stock market falls, and vice versaWhen bond prices makes bottom, stock prices also do, but bond prices give reversal at top before stock prices, and this may be a good reversal sign

Money Velocity- The velocity of money means how fast money turns over in the economyIt is calculated by taking Personal Income / M2So, it shows that when personal income to M2 goes down, it means the money is now flowing towards stock markets and vice versaSo, when it comes down, it means, less money is blocked in M2 (savings deposits) and now markets may move up Misery Index- Economist Arthur Okum designed the Misery Index in 1960s when inflation was a concernInflation when coupled with unemployment is known as StagflationSo, Misery index is an universal index which can be calculated by adding up the countrys inflation and unemployment rates togetherThis index is now modified to American Misery Index, which also adds Interest rates along with Inflation and Unemployment to give better pictureThe Federal Reserve system, also known as The Fed is the independent federal organization that determines and implements Monetary Policy for United StatesFed has 3 tools to control money supply- a) Changing the amount of reserves banks are required to hold, b) Changing the discount rate (repo), or c) Buying and selling US Treasury and G sec through its open market operationsThe third tool is the most widely used by Federal ReserveWhen FED purchases T bills from markets, money flows in to markets, and when FED sells T bills in markets, money is sucked out and no liquidity is available. Hence markets tends to go up when FED buys T bills, and markets tend to go down when FED sells T bills

Federal Reserve Valuation Model

It is also called as Greenspan model

This model gives a general indication of what the FED thinks about the markets, whether it is overvalued or undervalued

It is a valuation model that determines whether the stock market is too high or low based on the stock market earnings yield relative to yield on the ten year US noteThree Steps and a Stumble:Developed by Technical Analyst Edson Gould to check FED tightening credit.It says that whenever the FED Reserve raises either federal funds target rate, margin requirements or reserve requirements three consecutive times without a decline, the stock market is likely to suffer a substantial or big setbackIt means market is on verge of a top, and now correction will be bigThis rule have been successful as wellSimilarly there is a concept called Two Tumbles and a Jump, developed by FosbacksIt looks for two consecutive declines in the rates, and this means market would go up now

Banks borrow for short term and lend for long termSo they want long term interest rates to rise and short term interest rates to be lowerWhen short term interest rates are higher than the long term interest rates, the yield curve becomes invertedThis inverted yield curve is not only bad for banks, but also predicts markets going down for the next 2 to 6 quartersChapter 11 onwards Kilpatrick Part 2 PPT