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ASSIGNMENT -2

TECHNICAL ANALYSIS: Bharat Financial Inclusion Limited(BFIL)

Technical Analysis is the forecasting of future financial price movements based on an examination

of past price movements. Like weather forecasting, technical analysis does not result in absolute

predictions about the future. Instead, Technical Analysis can help investors anticipate what is

“likely” to happen to prices over time. Fundamental Analysis tells us “What to buy” and “What to

sell” whereas Technical Analysis tells us “When to buy and When to sell”.

Bharat Financial Inclusion has been chosen for analysis as its trending because of raising demand

of capital for investment into the rural market. Technical Analysis has been done on the company

using various oscillators and indicators like Exponential Moving Average (EMA), Moving

Average Convergence Divergence (MACD), Relative Strength Index (RSI), and Stochastic, On

Balance volume (OBV), Aroon Up/Down, Aroon Oscillator, and Accumulation/Distribution etc.

Period of Analysis - 01-04-2016 - 28-11-2016

Exponential Moving Average (EMA):-

Figure-1

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The above chart shows BFIL with 21-week Exponential moving average. The direction of the

moving average conveys important information about prices. A rising moving average shows that

prices are generally increasing. A falling moving average indicates that prices, on average, are

falling. A rising long-term moving average reflects a long-term uptrend. A falling long-term

moving average reflects a long-term downtrend.

When the Closing price is higher than the EMA, it is bullish and when it is lower than the

EMA, it is bearish.

Here, in the chart ‘red line’ indicates the EMA. So, when the red line passes the closing price from

below it gives a buy signal. On 01-4-2014, we can see the red line passes the price of the scrip

from below which indicates “Bullish”/ buy signal. On 21-10-2015, the red line (EMA) passes

above the scrip price indicating “Bearish”/ sell signal.

The highest price BFIL touched in the two years (period from 1-4-2014 - 28-11-2016) was around

Rs.907.03 on 29-07-2016 and lowest was Rs.240.06 on 04-04-2016.

It’s clear from the chart that, there is Support level at 240 and Resistance level at 907. Now i.e. on

28-11-2016, BFIL is showing Bearish trend as the EMA (red line) is above the scrip price. So,

there is possibility to incur loss. So, it’s better to sell the shares. The share price may fall up to 240,

if the same trend exist. In case, if it falls below 240, then there will be trend reversal.

If an investor is interested in investing in BFIL at this moment i,e. On 28-11-2016, then this is not

the right time to invest. This is because share price is below EMA. He should wait for the right

moment i.e. wait for the buy signal given by indicators. According to EMA, the investor can invest

once; the share price is above the EMA value. There is high chance that the share price will go

down. Also, it is always better to confirm by having a look at the volume. If there is high volume

and also EMA is below share price, then there is high chance that it’s an upward trend i.e. share

price will go up resulting in good profit for the investor.

Moving Average Convergence Divergence (MACD):-

MACD is a trend-following momentum indicator that shows the relationship between two moving

averages of prices.

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Figure 2

When the fast line (i.e. MACD) crosses above the slow line (9 EMA of MACD), it’s a buy

signal and when the slow line crosses the fast line, it’s a sell signal.

As on28-10-2016, we can see the fast line (red line) is below the (9 EMA of MACD) violet line,

it indicates “sell” signal. There is high probability that the share price may go down. It is showing

bearish trend. When red line is above violet line, we must make sure that both the lines are in

bullish zone i.e. above 0. If both the lines are below 0, then it may not be the right time to “buy”

as it would be in bearish zone.

According to MACD indicator also, it’s better for the investor to sell the shares which is held by

him. There is high probability of share price going down.

As per the investment point of view this is not the right time to invest in this company this is

because, red line (MACD) is below the violet line (9 EMA of MACD). If the investor wants to know the

right moment to buy, then MACD may help to an extent.

When MACD value > 9 EMA, then the trend that exist is considered to be “Bullish” and when the

MACD value < 9 EMA then the trend that exist considered to be “Bearish”. So, an investor should

invest once, the red line (MACD) passes the violet line (9 EMA) from below and also make sure

that the MACD values are in support zone i.e. above 0 reference level.

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RELATIVE STRENGTH INDEX (RSI):-

Figure 3

In RSI, movements above 70 are interpreted as indicating overbought conditions; conversely,

movements under 30 reflect oversold conditions. In terms of market analysis and trading signals.

RSI moving above the horizontal 30 reference level is viewed as a bullish indicator, while the RSI

moving below the horizontal 70 reference level is seen to be a bearish indicator. Also traditionally

it is advisable to sell when the stock enters OB (overbought) region and buy when the stock enters

OS (Oversold) region.

Here, in the chart, it’s clear that from Jan 2015 till Feb 2015 and May 2016 to Aug 2016, RSI was

above 70 reference level indicating overbought region resulting in bearish trend. At this point,

traders earn their profit by selling their shares.

Now i.e. on 28-11-2016, RSI is around 40. RSI is moving towards 30. There is high chance that

share price will go down as it’s a bearish trend. So, it’s better to sell the shares at this moment.

As per the investment point of view it is not the right moment to invest. This is because RSI is

falling and its around 40 reference level. If the investor is waiting for the right moment, then he

can invest according to the signals given by Relative Strength Index (RSI). The right moment to

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invest will be when RSI reaches 30 reference level and move upwards. Reference level 30 indicates

oversold condition with buying pressure.

STOCHASTIC:-

Figure 4

As we can see in the chart, two lines – red and violet. Red line is the stochastic and blue line is the

signal.

If %K rises above %D, that’s a buying signal (unless the values are greater than 80) and if

it falls lower than %D, that’s a selling signal.

At the end of October-November 2016, it can be seen that the %D is above the reference level 80

indicating Overbought i.e. it’s time to sell. There is high probability that the share price may fall.

So, it would be better for investor to sell the shares which is held by him. If he keeps on holding,

then it may result in reduction of the amount of profit he has earned till now.

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As per investment perspective as of now it is not the right time to invest though it is in oversold

condition this is because red line (%K) is almost going to coming down the violet line (%D), so

the right moment right moment according to Stochastic is when red line (%K) rises above the blue

line (%D) and also by ensuring that the values are not greater than 80.

AROON UP/DOWN:

Figure 5

The Aroon indicator is a relatively new technical indicator. The Aroon is a trending indicator used to

measure whether a security is in an uptrend or downtrend and the magnitude of that trend.

When the Aroon Up is above the Aroon Down, there is upward trend. Conversely, when the Aroon

Up is below the Aroon Down, it is downward trend.

Here, in the above chart, It can be seen there is upward trend from April 2016 till October 2016,

as the Aroon Up is above the Aroon Down. From November 2015, Aroon Up moves below the

Aroon Down, indicating bearish trend. Which means the share price will further go down. So, it’s

better for the investor to sell the shares held by him. If he keeps on holding, then it may result in

reduction in the amount of profit earned by him.

As the Aroon Up is below the Aroon Down, it is not the right moment for an investor to invest,

though he is interested in investing. If he do so, he may incur loss i.e. resulting in eradication of

capital. So, he should invests once Aroon Up is above the Aroon Down.

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ON-BALANCE VOLUME (OBV):-

Figure 6

The on-balance volume (OBV) indicator is a well-known technical indicator that reflect

movements in volume. It is also one of the simplest volume indicators to compute and understand.

Expect prices to move higher if OBV is rising while prices are either flat or moving down. Expect

prices to move lower if OBV is falling while prices are either flat or moving up.

From the above chart it can be understood, on Oct 2016 to Nov 2016 there is a fall in OBV indicating there is high chance that the share price will go down. So, it would be better for investor

to sell the shares held by him.

If an investor is interested in investing, then he can do so by using On-Balance volume indicator.

This is not the right moment for Investor to invest according to OBV indicator. This is because on

25-11-2016, OBV is falling. This shows bearish trend i.e. there is high chance that the share price

will go down. It is good to invest when the OBV is rising, not only when the prices are moving

but also even when the prices are flat. There is a high chance that the share price will go up resulting

in good return for the investor.

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RECOMMENDATIONS:

Situation-1: An investor is holding 1000 shares which he purchased on 1st

April, 2014.

After analyzing, it has been found that, it would be better for an investor to sell the entire shares

i.e. 1000 shares worth Rs. 684,000 held by him. On 04-1-2014, the share of BFIL was Rs.240.

Now, i.e. on 28-11-2016, the share price is Rs.684. If the investor sell the shares now, he would

earn a profit of only Rs.444/share. i.e. 444,000 for 1000 shares. This is because the share price of

BFIL has almost increased by Rs 444 . He would have earned a good amount if he had sold the

shares on Rs.907.03 on 29-07-2016 which was the highest price in the two years (period from

1-4-2011- 28-7-2016). ). If he keeps on holding shares, then his profit may further reduce as there

is high chance that share price will go down. Because, most of the indicators have given signal to

sell as it’s a bearish trend. So, the final recommendation would be to sell the shares held by him.

Situation-2: An investor does not hold any shares but is interested in investing.

It is good that investor is interested in investing. But, after doing Technical Analysis it is found

that, it is not the right time to invest in BFIL. Because, all the indicators chosen for analysis shows

bearish trend i.e. there is high chance that the share price will go down. If investor invests now,

then in the beginning itself, he may incur loss resulting in eradication of capital. So, it’s better for

the investor to wait for the right time to invest. The investor can know the right time by following

the signals given by indicators.