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ASSIGNMENT-2

TECHNICAL ANALYSIS

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”

Tata Motors has been chosen for analysis as its trending because of exit of Cyrus Mistry

who was the sixth chairman of Tata group. 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), Stochastic, On-

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

Period of Analysis - 01-04-2016 - 25-7-2016

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. 401000 held by him. On 04-1-2014, the share of Tata

Motors was Rs.401. Now, i.e. on 25-7-2016, the share price is Rs.452. If the investor sell the

shares now, he would earn a profit of only Rs.51/share. i.e. 51000 for 1000 shares. This is

because the share price of Tata Motors has almost came back to same level where it was

2years ago. He would have earned a good amount if he had sold the shares on 6-2-2015 at

Rs.612 which was the highest price in the two years (period from 1-4-2011- 29-7-2016). ). 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 Tata motors.

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, its

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.

The analysis using various indicators are as follows:-

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Exponential Moving Average (EMA):-

The above chart shows Tata Motors 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 24-04-2015, the red line

(EMA) passes above the scrip price indicating “Bearish”/ sell signal.

The highest price Tata Motors touched in the two years (period from 1-4-2011 - 29-7-2016)

was around Rs.612 on 06-02-2015 and lowest was Rs.265 on 12-02-2016.

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It’s clear from the chart that, there is Support level at 300 and Resistance level at 600. Now

i.e. on 27-11-2016, Tata Motors 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 upto 300, if the same trend exist. In case, if it falls below 300, then there will

be trend reversal.

If an investor is interested in investing in Tata Motors at this moment i,e. On 25-11-2016,

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. It may go down till its support level. In case, if t goes

below the support level (here, for Tata Motors it is 300), then there will be a trend reversal. If

there is no trend reversal, then the investor can invest once the share price reaches 300 and

move upwards. He must make sure that EMA is below the share price. 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.

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Moving Average Convergence Divergence (MACD):-

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

moving averages of prices.

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. At the end of

November 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.

If an investor is interested in investing but has not invested any amount till now. Then this is

not the right time to invest. 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 it is “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):-

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 July 2015 till October 2015, RSI was below 30

indicating oversold region. In Oversold region, there exists buying pressure. So, traders again

start purchasing shares. From July 2016 to August 2016, RSI was above 70 reference level

indicating overbought condition, resulting in bearish trend. At this point, traders book their

profit by selling their shares. Now i.e. on 25-11-2016, 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.

If an Investor has not invested any amount but is interested in investing then 25-11-2016 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 invest will be when RSI

reaches 30 reference level and move upwards. Reference level 30 indicates oversold

condition with buying pressure.

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STOCHASTIC:-

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 November 2016, we can see 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.

If an Investor is interested in investing in Tata Motors, then it is not the right time to invest

though it is in Oversold condition. This is because red line (%K) is below the violet line

(%D), If the investor wants to invest some money in Tata Motors according to Stochastic

indicator, then he should wait for the right moment. The 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.

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AROON UP/DOWN:-

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, We can see there is upward trend from April 2014 till March 2015,

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

Aroon Down, indicating bearish trend. Again on November 2016, Aroon Up is moving above

the Aroon Down indicating downward trend.

From October 2016 till now i.e. 27-11-2016, Aroon Up is below the Aroon Down, 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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AROON OSCILLATOR:-

An expansion of the Aroon is the Aroon oscillator, which simply plots the difference between

the Aroon up and down lines by subtracting the two lines. This line is then plotted between a

range of -100 and 100. The centerline at zero in the oscillator is considered to be a major

signal line determining the trend. The higher the value of the oscillator from the centerline

point, the more upward strength there is in the security; the lower the oscillator's value

is from the centerline, the more downward pressure.

Here, in the above chart, from April 2014 till April 2015, the value of oscillator is high from

the centreline, so there is high upward strength, indicating the share price will go up. From

June 2015 till Oct 2015, there is high downward strength as the value of oscillator is very low

i.e. around -100.And we can see, the share price has gone down according to the oscillator.

Now, on November 2016, the value of oscillator is around -75 which is very indicating there

is high downward strength, that is 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.

This is not the right moment for an investor to invest though he is interested. If he do so, then

he may incur loss. This is because, on 25-11-2016 the oscillator is around -75, which

indicates there is high downward strength i.e. there is high chance that the share price will go

down. So, he should wait for the “buy signal” given by indicators. When the value of Aroon

Oscillator is high from the centreline, it indicates high upward strength that is there is high

chance that the share price will go up.

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ON-BALANCE VOLUME (OBV):-

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.

Granville theorized that volume precedes price. . Granville noted in his research that OBV

would often move before price.

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.

Here in the above chart, on Jan 2015 to October 2015 we can see that there is fall in OBV

before the share price falls. Thus, volume precedes price. Now i.e. on 25-7-2016, OBV is

falling 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.