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TABLE OF CONTENTS

1. INTRODUCTION TO TECHNICAL ANALYSIS - BASIC PRINCIPLES,

PHILOSOPHY, SCOPE & OBJECTIVE
 WHAT IS TECHNICAL ANALYSIS ?
 TECHNICAL STUDY IS AN ART AND EMPIRICAL SCIENCE
AS WELL
 BASIC PRINCIPLES OF TECHNICAL ANALYSIS
 FUNDAMENTAL ANALYSIS vs TECHNICAL ANALYSIS
 BASIC DEFINITIONS/TERMINOLOGY

2. DOW THEORY
 The Market ( The Index ) Discounts Everything
 The Three Trends.
 The Primary Trends
 The Secondary Trends
 The Minor Trends
 The Bull Market
 The Bear Market
 Volume Goes with the Trend
 A Trend Should Be Assumed to Continue in Effect Until
Such Time as Its Reversal Has Been Definitely Signaled
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3. IMPORTANT REVERSAL & CONTINUATION PRICE PATTERNS

 HEAD & SHOULDER REVERSAL PATTERN
 ROUNDING TOP AND ROUNDING BOTTOM FORMATION
 TRIANGLES
 SYMMETRICAL TRIANGLES
 ASCENDING - RIGHT ANGLE TRIANGLE
 DESCENDING - RIGHT ANGLE TRIANGLE
 RECTANGLES
 DOUBLE AND TRIPLE TOPS & BOTTOMS (MAJOR
REVERSAL PATTERN)
 THE BROADENING FORMATIONS
 THE DIAMOND
 THE WEDGE
 FLAGS (CONTINUATION PATTERN ONLY )
 THE PENNANT - A POINTED FLAG ( CONTINUATION
PATTERN ONLY )
4. GAPS
 COMMON GAPS
 BREAKAWAY GAPS
 CONTINUATION GAPS OR RUNAWAY GAPS
 EXHAUSTION GAPS
 ISLAND REVERSAL
5. TRENDLINES & TRENDCHANNELS
 TRENDLINES
 TRENDCHANNELS
 3 FAN TRENDLINES
6. VOLUME OBSERVATION

7. MOVING AVERAGES
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 ORIGIN, DEFINITION AND FORMULA

 TYPES OF MOVING AVERAGE
 SIMPLE MOVING AVERAGE
 Exponential Moving Averages
 TIME SERIES
 WEIGHTED
 MARKET PSYCHOLOGY
 TRADING RULES
8. MOMENTUM INDICATORS
 INTRODUCITON
 OVERBOUGHT AND OVERSOLD ZONES
 DIVERGENCES
 RATE OF CHANGE (ROC)
 BASIC DEFINITION
 METHOD OF CALCULATING
 INTERPRETATION & TRADING RULES

 DIVERGENCES
 RELATIVE STRENGTH INDEX

 BASIC DEFINITION
 METHOD OF CALCULATING
 INTERPRETATION & TRADING RULES
 DIVERGENCES
 STOCHASTICS
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 BASIC DEFINITION
 METHOD OF CALCULATING
 INTERPRETATION & TRADING RULES
 DIVERGENCES
9. WEEKLY, MONTHLY , YEARLY & HOURLY CHART

10. SUPPORT AND RESISTANCE

11. MISCELLANEOUS INDICATORS/TRADING METHODS AND

SYSTEMS
 SPEED RESISTANCE LINES
 BOLLINGER BANDS (STANDARD DEVIATION CHANNELS)
 ENVELOPE
 WILLIAMS R
 CHAIKIN OSCILLATOR
 CCI
 ON BALANCE VOLUME
12. FIBONACCI STUDIES
 FIBONACCI ARCS
 FIBONACCI FANS
 FIBONACCI RETRACEMENTS
 FIBONACCI TIME ZONES
 FIBONACCI DAYS & WEEKS
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13. W. D. GANN
 TRADING RULES
 GANN ANGLES
14. JAPANESE CANDLESTICK
 BASIC DEFINITION
 PATTERNS

 HAMMER & HANGING MAN

 ENGULFING PATTERN

 HARAMI

 HARAMI CROSS

 PIERCING LINE

 DARK CLOUD COVER

 DOJI STAR

 MORNING STAR AND EVENING STAR

 ABANDONED BABY

 MEETING LINES

 THREE WHITE SOLDIERS

 ADVANCE BLOCK

 UNIQUE THREE RIVER BOTTOM

 THREE BLACK CROWS
 TWO CROWS
 THREE INSIDE UP AND THREE INSIDE DOWN
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 THREE STARS IN THE SOUTH

 CONCEALING BABY SWALLOW
 STICK SANDWICH
 KICKING
 HOMING PIGEON
 MATCHING LOW
 UPSIDE GAP TWO CROWS
 SIDE-BY SIDE WHITE LINES
 RISING THREE METHODS AND FALLING THREE
METHODS
 UPSIDE TASUKI GAP AND DOWNSIDE TASUKI GAP.
RISING THREE METHODS AND FALLING THREE
METHODS
 SEPARATING LINES
 THREE LINE STRIKE
 UPSIDE GAP THREE METHODS AND DOWNSIDE GAP
THREE METHODS
 ON NECK
 THRUSTING
 IN NECK

15. SPECULATORS STRATEGY

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TECHNICAL ANALYSIS OF STOCK TRENDS

1. INTRODUCTION TO TECHNICAL ANALYSIS

- BASIC PRINCIPLES, PHILOSOPHY , SCOPE & OBJECTIVE

1.1 WHAT IS TECHNICAL ANALYSIS ?

Technical analysis is an organized and systematic study of market action through

use of charts, of a particular scrip or index for the purpose of identifying trend
changes at an early stage and to maintain an investment or speculative position
until the weight of the evidence indicates that the trend has changed with the
help of price and volume data of any share or index. Technical analysis is
basically studying the price action or behaviour only .

1.2 TECHNICAL STUDY IS AN ART AND EMPIRICAL SCIENCE AS

WELL :-

Technical study remains more as an art . At best it can be considered as an

empirical science wherein judgment plays an important role in successful
performance of the science .

1.3BASIC ASSUMPTIONS OF TECHNICAL ANALYSIS

i. Price discounts everything. Price is supreme.

The price which of any scrip is the result of all the factors affecting it ,
which are far reaching and to narrate a few it may be -
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MICRO FACTORS :-the industry prospects to which the company belongs

or the performance of the company or the management of the company,
brand image of the company , monopolistic element , competitors strength ,
financial strength and in country like India political strength may too play an
important role in determining the price of particular scrip.
MACRO FACTORS:- Global factors, Political condition , economic health
of the country, , climatic conditions, Business sentiment and confidence etc.
They are also reflection of hopes , fears, knowledge , optimism and greed of
the investing public The sum total of these emotions are expressed in the
price level.KEYNES : “ We are not concerned with what an investment is
really worth but with the market will value it under the influence of mass
psychology “

A technical analyst is only concerned with the price of the scrip and to form
a judgment about whether the market is bullish or bearish. He is not
concerned with the cause and effect relations or in finding out the factors or
reason for change in the price . As explained above Price is the resultant of
all the factors affecting it and since the technical analyst’s study concerns
with price and only price , he is not at all concerned with the reasons which
have influenced the price.
A true technical analyst will not give importance to the NEWS and he will
not be influenced by the news in making any trading decisions. He has to
become immune to what is going around him and just concentrate on the
PRICE.

ii. Market moves in trend and when established remains in force until there is
evidence of change.
Market has Rhythm . It moves in trend and hence it is possible to interpret,
the market, since history repeats because human nature does not change .The
 PAGE : 9

market moves are cyclic and repetitive, The market does not move in
random. Once the trend is set it continues in that direction and before
reversing its direction it will give proper signals indicating change of trend .

00BSE Sensex 30 C (5,487, 5,556, 5,487, 5,541) 4700

4548 1- MARKET MOVES IN RYTHM 4650
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3209 3150
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June July August SeptemberOctober NovemberDecember 1998 February

iii. Market action is repetitive :

The charts patterns are repetitive , hence one can interpret the future
behaviour of the price, e.g. Head and Shoulder pattern is bearish formation
and on break out from such pattern prices can be expected to fall. This is
because human nature tends to react to similar situations in consistent ways.
Human psychology do not change everywhere all over the world. The price
movements are a mere reflection of mass human response .

iv. Market discounts future :

We usually see , when the good news for a particular scrip announced , the
price of that scrip falls ; The reason is , the market has already gone up in the
recent past on the expectation of such good news and when the news are
 PAGE : 10

declared there is profit booking. In Reliance we have seen this happening . It

is said that Mandy starts from a silver sky, and when only good news are
coming from every corner . A technical analyst talking about change of trend
from Teji to Mandi , in such booming times is believed to be a lunatic. The
reason is, market has collective intelligence , which is supreme, and it knows
that something bad is going to happen in future and the market begins to
decline. Only market can foresee not any single individual . Similarly Teji
starts when there is no hope and all is bad around you.So Teji starts in gloom
and Mandi starts in Boom.

1.4 FUNDAMENTAL ANALYSIS vs TECHNICAL ANALYSIS

Fundamental analysis involves comprehensive study of all the factors under the
sun , affecting the price. So , it is the study of cause and effect relationship
between price and the factors affecting price. Fundamental analysis is study of all
Macro and Micro factors and then determining what should be the present
value of the shares , and if it is lower than the prevailing market price one would
buy that scrips. Some of the factors affecting the price is as under :-
MACRO FACTORS :- Political Climate, International Situations like Asia crisis
or Bill’s affair , Budgets, Elections, Economic Sanctions , Natural Calamities ,
Mass Psychology , Insider Trading, Manipulation by operators , and so on
MICRO FACTORS :- Industry Prospects, Domestic as well as International
Demand Supply and International Prices, like Reliance profitability depends on
international prices of Polymers, Quality of management, market share of a
particular company, competitors strength and policies, type of plant and
machinery, level of technology , and so on
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It is very difficult for one or few people to study all the factors , since no man has
better intelligence than market , and decides its weightage or effect on the price
and which too is not constant over a period of time for the purpose of
determining the intrisinic value of the equity share of a particular company. in
Technical Analysis one has to concentrate only on the price . In technical
analysis the only data required is the price and colume, which is available at
lowest cost.

1.5 FINER POINTS

1. Technical Analysis is an Art. It is based on past observation .

2.Technical analysis is workable in any free market economy ,and a technical
analyst should not be bothered about manipulation by operators , wars, budgets,
elections , etc. A technical analyst should be fearless and should do trading or
investment without worrying about uncertainties , of course he should use
appropriate stop loss in order to minimize the risk .
3. Technical Analysis is complete tool in itself and a technical student is able to
take all trading and investment decision based on technical study only and he is
not suppose to analyze any other data/information etc, micro/macro level (
like balance sheet of the company or rate of industrial production , political
analysis , international factors, since market action translated into price discounts
everything.
4. For being successful one should totally cut off from fundamental study or
current news and not to think of its effect on the market.
5.Stock market and Human behavior all over the world are the same and hence
one can successfully employ technical analysis to any stock markets of the
world.
6. Existence of free markets i.e. free demand and supply is essential for success
 PAGE : 12

of technical analysis.
7. The market price is determined by the all the factors that affect demand and
supply.
8. Fundamentals do not change overnight , but human response to price can be a
sudden.
9. A trader taking decisions based technical analysis should not be
overconfident. He should always be alert and watch the market constantly since
the trend can change any time.
10. Do not trade without proper stop loss , since technical analysis gives
probability and it may be possible that on any particular occasion , the odds may
be against him and the only way to safeguard , is to use stop loss.
11. In science there is cause and effect relation , but in the market we find reverse
situation . In market we find effect (in terms of price movements ) takes place
first and the cause (reason) is known later.
12. Market is usually ahead of news . In the year 1994 , the market was at its top.
13. Do not marry any scrip
14. Do not buy on news.
15.Do not buck the trend.
16.Do not buy because prices are low.
17. The wise & intelligent can foresee the market . When a train is about to enter
a dark tunnel , it is only the engine driver who will first come to know that the
train is going to enter the dark tunnel. Similarly when the train is going to come
out of the tunnel , again the engine driver will be able to see the light first.

1.6. BASIC DEFINITIONS/TERMINOLOGY:-

i. Line Chart :- Chart drawn on the basis of daily closing prices of each scrip.
ii. Bar Chart :- Open High Low Close Bar for each day .
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iii. Long Position :- When a trader takes buy position expecting the market to go
up , he has said to be taken long position and is called as Bull or Tejiwala.
iv. Short Position :- When a trader takes sale (without delivery sale) position
expecting the market to go down , he has said to be taken short position and is
called as Bear or Mandiwala.
vi. Accumulation Stage :- The period during which a particular share is being
continuously being bought over a period of time . This concept is also true for
the whole market .
vi. Distribution Stage :- It is the reverse of Accumulation , during which shares
of a particular scrip is being sold continuously over a period of time .
vii. Volume :- The number of shares traded during a trading session .
viii. Stop Loss: When a trader enters into any long /short position it is necessary
for him to determine the stop loss level and to book loss if the market moves
against him .The stop loss price is the predetermined price which when hit , the
trader books his loss .
xi. A price chart is a pictorial presentation of price movement by plotting price
on Y axis and date on X-axis . There is a Chinese proverb which says : A single
picture speaks more than a 1000 words.
ix : Speculation and Gambling : - Speculation is generally a dirty word in stock
market and usually misunderstood. Speculation is intelligent reasoning of mind.
Speculation is not equal to gambling .

CHAPTER 2. DOW THEORY :-

The Dow theory is the grandfather of all technical studies. MR Charles H.
Dow is the inventor of technical analysis. Dow founded the Dow -Jones
 PAGE : 14

financial new service and is credited with the invention of stock market
averages. Dow had not written any specific theory, but he found that market
moves in motion . Dow use to write editorials in Wall Street Journals on market
movements . Upon his death in 1902 , his successor as editor of journal ,
William P. Hamilton took up Dow’s principles and in the course of 27 years of
writing on the stock market , organized them and formulated then into the Dow
Theory. Dow theory is being critisized for being too late. Following are the
Tenants of Dow Theory :-

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2 3150
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3 to 4 = Second Intermediate Correction/Decline
Against The Major Trend 3050
3000
4 to 5 = Third Intermediate Bull Run In Line2950
with Major
Trend 2900
2850
0 2800
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1996 February March April May June July

2.1. The Market ( The Index ) Discounts Everything :-

Because they reflect the combined market activities of thousands of

investors including those possessed of the greatest foresight and the best
information on trends and events, the averages in their day-to-day
fluctuations discount everything known, everything foreseeable, (except
 PAGE : 15

the act of God), and every condition which can affect the supply of or the
demand for corporate securities..

2.2. The Three Trends :-

The “Market,” meaning the price of stocks in general, swings in trends,

of which the most important are its Major or primary Trends. These are
the phases of up or down trend which usually last for a year or more and
results in general appreciation or depreciation in value of more than 20%.
Movements in the direction of the Primary trends are interrupted at
intervals by Secondary correction in the opposite direction-- reactions or
“corrections” which occur when the primary move has temporarily “
gotten ahead of itself.”.

2.3. The Primary Trends :-

These, as aforesaid, are the broad, overall up and down trends which
usually (but not invariably) last for more than a year and may run for
several years. So long as each successive rise (price advance) reaches a
higher level than the one before it, and each secondary reaction stops (i.e.
, the price trend reverses from down to up) at a higher level than the
previous reaction, the Primary Trend is deemed to be Up. This is called a
Bull Market. Conversely, when each intermediate decline carries prices to
successively lower levels and each intervening rally fails to brings them
back up to the top level of the preceding rally, the primary Trend is Down
,and that is called a Bear Market.

2.4. The Secondary Trends :-

 PAGE : 16

These are the important reactions that interrupt the progress of prices in
the Primary direction. They are the Intermediate declines or “corrections”
which occur during Bull Markets or the intermediate rallies or
“recoveries” which occur in the Bear Markets. Normally, they last for
from three weeks to as many months, and rarely longer. Normally, they
retrace the previous move from one-third to two-thirds of the gain (or loss
, as the case may be ) in prices registered in the preceding swing in
Primary direction. Thus, in a Bull Market, prices might rise steadily, or
with only brief and minor interruptions , for a total gain of say 30 points
before a Secondary correction occurred . That correction might then be
expected to produce a decline of not less than 10 points and not more than
20 points before a new Intermediate advance in the Primary Bull trend
developed.

Note, however, that the one-third/two thirds rule is not an unbreakable

law; it is simply a statement of probabilities. Most Secondaries are
confined within these limits; many of them stop very close to the halfway
mark, retracing 50% of the preceding Primary swing; they seldom run
less than one-third, but some of them cancel nearly all of it.

Thus we have two criteria by which to recognize a secondary trend. Any

price movement contrary in direction to the primary trend which lasts for
at least three weeks and retraces at least one-third of the preceding net
move in the Primary direction (from the end of the preceding secondary
to the beginning of this one, disregarding minor fluctuations) is labeled
these criteria, however, the secondary trend is often confusing; its
recognition, its correct appraisal at the time it develops.
 PAGE : 17

2.5. The Minor Trends :-

These are the brief fluctuations which are so far as the Dow Theory is
concerned-- meaningless in themselves, but which,in toto, make up the
Intermediate trends. Usually, but not always, an Intermediate swing,
whether a secondary or the segment of a primary between successive
secondaries, is made up of a series of distinguishable Minor waves.
Inferences drawn from these day-to-day fluctuations are quite apt to be
misleading. The Minor trend is only one of the three trends which can be
“ manipulated” (although it is, in fact, doubtful if under present
conditions even that can be purposely manipulated to any important
extent ). Primary trends cannot be manipulated; it would strain the
resources of the Apex bank of any country .

The Primary, Secondary and Minor trends are compared with the tidal
waves. In a high tide every next wave reaches higher and higher points ,
this is the Primary trend , while one can see the tide receding during the
high tide movements which is the secondary trend which is against the
primary trend , and the minor trend can be compared with the small
waves movements - the ripples. .

Major Trend Phases

2.6. The Bull Market :-

Primary uptrends are usually ( but not invariably) divisible into three
phases . The first is the phase of accumulation during which farsighted
investors, sensing that business, although now depressed, is due to turn
 PAGE : 18

up, are willing to pick up all the shares offered by discouraged and
distressed sellers, and to raise their bids gradually as such selling
diminishes in volume. Financial reports are still bad--in fact , often at
their worst--during this phase. The “Public” is completely disgusted with
the stock market-- out of it entirely. Activity is only moderate but
beginning to increase on the rallies. The second phase is one of fairly
steady advance and increasing activity as the improved tone of business
and a rising trend in corporate earnings begin to attract attention. It is
during this phase that the “technical” trader normally is able to reap his
best harvest of profits. Finally comes the third phase when the market
boils with activity as the “public” flocks to the borardrooms. All the
financial news is good; price advances are spectacular and frequently
“make the front page” of the daily papers; new issues are brought out in
increasing numbers. It is during this phase that one of your friends will
call up and blithely remark, “says, I see the market is going up. What’s a
good buy? ” --all oblivious of the fact that it has been going up for
perhaps two years, has already gone up a long ways and is now reaching
the stage where it might be more appropriate to ask, “What’s a good thing
to sell? “ In the last stage of this phase, with speculation rampant, volume
continues to rise, but “ air pockets” appear with increasing frequency; the
“cats and dogs” (low-priced stocks of no investment value) are whirled
up, but more and more to the top-grade issues refuse to follow.

2.7. The Bear Market :-

Primary downtrends are also usually (but again, not invariably)

characterized by three phases. The first is the distribution period (which
really starts in the later stages of the preceding Bull Market). During this
 PAGE : 19

phase, farsighted investors sense the fact that business earnings have
reached an abnormal height and unload their holdings at an increasing
pace .’A’ group shares rise slowly compared to ‘B’ Group shares at alter
stage since , the former has already advances . Trading volume is still
high though tending to diminish on rallies, and the “public” is still active
but beginning to show signs of frustration as hoped-for profits fade away.
The second phase is the panic phase. Buyers begin to thin out and sellers
become more urgent; the downward trend of prices suddenly accelerates
in to an almost vertical drop, while volume mounts to climatic
proportions. After the panic phase (which usually runs too far relative to
then-existing business conditions), there may be a fairly long secondary
recovery or a sidwise movement, and then the third phase begins. This is
characterized discouraged selling on the part of those investor who held
on through the panic or , perhaps, bought during it because stocks looked
cheap in comparison with prices which had ruled a few months earlier.
The business news now begins to deteriorate. As the third phase
proceeds, the downward movement is less rapid, but is maintained by
more and more distressed selling from those who have to raise cash for
other needs. The “cat and dogs advance “ may lose practically all their
previous Bull advance in the first two phases. Better grade stocks decline
more gradually, because their owners cling to them to the last, and the
final stage of a Bear Market, in consequence, is frequently concentrated
in such issues. The Bear Market ends when everything in the way of
possible bad news, the worst to be expected, has been discounted, and it
is usually over before all the bad news is “out.”So even after the market
has bottomed out in the early stages of ensuing Bull run , news continues
to be bad but prices fail to fall furthur. For example , In or around Oct-
Nov 98 Telco declared huge losses but the prices started looking up.
 PAGE : 20

The participants are warned, however, that no two Bull/Bear Markets are
exactly alike, Some may lack one or another of the three typical phases.
A few short Bear Markets have developed no marked panic phase and
others have ended with it,. No time limits can be set for any phase; the
third stage of a Bull Market, for example, the phase of excited speculation
and great public activity, may last for more than a year or run out in a
month or two. The panic phase of a Bear Market is usually exhausted in a
very few weeks if not in days, Nevertheless, the typical characteristics of
Primary trends are well worth keeping in mind. If you know the
symptoms which normally accompany the last stage of a Bull Market, for
example, you are less likely to be deluded by its exciting atmosphere.

Principle of Confirmation

2.7. Volume Goes with the Trend :-

Trading activity tends to expand as prices move in the direction of the

prevailing Primary trends. Thus, in a Bull Market, volume increases when
prices rise and dwindles as prices drop.; It is only the overall and relative
volume trend over a period of time that may produce helpful indications.
Moreover, in Dow Theory, conclusive signals as to the market’s trend are
produced in the final analysis only by price movement. Volume simply
affords collateral evidence which may aid interpretation of otherwise
doubtful situations. In USA there are two major averages - The Industrial
average and the Transport average . Both the averages should confirm the
trend.

2.8. Lines”(Side wise movements) may Substitute for Secondaries :-

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A line in Dow Theory parlance is a sidewise movement (as it appears on

the charts) in one or both of the averages, which lasts for two or three
weeks or, sometimes, for as many as many months, in the course of
which prices fluctuate within a range of approximately 5% or less ( of
their mean figure). The formation of a line signifies that pressure of
buying and selling is more of less in balance. Eventually, of course, either
the offerings within that price range are exhausted and those who want to
buy stocks have to raise their bids to induce owners to sell, or else those
who are eager to sell at the “line” price range find that buyers have
vanished and that in consequence they must cut their prices in order to
dispose of their shares. Hence, an advance in prices through the upper
limits of an established line is a bullish signal and, conversely, a break
down through its lower limits is a bearish signal. Generally speaking, the
longer the price (in duration) and the narrower or more compact its price
range, the greater the significance of its ultimate breakout.

Lines occur often enough to make their recognition essential to followers

of Dow’s principles. They may develop at important tops or bottoms,
signalizing periods of distributions or of accumulation, respectively, but
they come more frequently as interludes of rest or consolidation in the
progress of established Major trends. Under those circumstances, they
take the place of normal Secondary waves..

2.9. Only Closing Prices Used :-

Dow Theory pays no attention to any extreme highs or lows which may
be registered during a day and before the market closes, but takes in to
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account only the closing figures, i.e., the average of the day’s final sale
prices of any security .

2.10. A Trend Should Be Assumed to Continue in Effect Until Such

Time as Its Reversal Has Been Definitely Signaled :-

What it states is really a probability. It is a warning against changing

one’s market positions too soon, against “jumping the gun.” It does not
imply that one should delay action by one unnecessary minute once a
signal change in trend has appeared, but it expresses the experience that
the odds are in favour of the man who waits until he is sure, and against
the other fellow who buys (or sells) prematurely. This Dow tenet says,
”Hold your position pending contrary orders.”
A corollary to this tenet, which is not so contradictory as it may at first
seem, is : A reversal in trend can occur any time after that trend has been
confirmed. This can be taken simply as a warning that the Dow Theory
investor must watch the market constantly so long as he has any
commitment in it.
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CHAPTER 3. IMPORTANT REVERSAL & CONTINUATION

PRICE PATTERNS :-
Stock prices move in trends. Some of this trends are straight , some curved ,
some brief , some long-continued , some are irregular or poorly defined and
others are amazingly normal or uniform. The market gives signals before
changing its trend . The happening is not just sudden .Take an example of a
truck which is moving along. Now if the truck wants to take a ‘U’ turn , it will
slow down , stop, and takes turn and it may have to move forward or backward
to take turn , and then it completes the turn , moves forward in the reverse
direction and then accelerates .When the price tends to reverse its direction from
top to down or from down to top , a characteristic AREA or PATTERN takes
shape on the chart. This shape is called as pattern or reversal formation . There
are various types of such pattern formation which I shall be describing below .
The formations of various patterns and the idea of interpreting its effect on the
prices are developed on the basis of observation over a very long period of
time and it is possible to interpret ( in the sense of up or down price movement
only ) the effect on the prices since the market action is repetitive ( this principle
has been explained in chapter no.1) .

3.1 HEAD & SHOULDER REVERSAL PATTERN :-

3.1.1 . It is a MAJOR reversal pattern and one of the most reliable

one.The head and shoulder pattern appearance signifies reversal of bull
market and hence a valid pattern is seen at the top of the market.
Following are the typical features of this pattern and it consists of -

A. LEFT SHOULDER:- A strong rally , on which trading volume

becomes very heavy, followed by a minor recession on which volume
 PAGE : 24

runs considerably less than it during the days of rise .This is the LEFT
SHOULDER.
B. HEAD: Second high volume advance which reaches a higher level
than the top of the left shoulder , and then another reaction on less
volume which takes prices down to somewhere near the bottom level
of the preceding reaction but lower than the left shoulder top, which is
the first sign of weakness . This is the HEAD .
C: RIGHT SHOULDER :- A third rally , on less volume (compared to
the left shoulder or head) which fails to reach the head before another
decline starts and the prices come down near to the bottom of the left
shoulder and head. This is the RIGHT SHOULDER.
D:- FINALLY :- The decline from the right shoulder which breaks the
neckline and when the prices go below it , it completes the Head and
Shoulder pattern signifying end of a major bull run .
Picture 1
00BSE Sensex 30 C (4,961, 4,973, 4,892, 4,963) 4200
Head 4150
4100
4050
left 4000
shoulder 3950
Right 3900
Shoulder 3850
3800
3750
Neck Line 3700
3650
3600
3550
3500
3450
3400
3350
3300
3250
3200
3150
3100
3050
3000
2950
2900
2850
2800
March April May June July August September
October November

Picture 2
 PAGE : 25

01TISCO (F&O) (305.0, 305.0, 295.6, 297.8) 350

HEAD 340
RS 330
320
LS Upsloping 310
Neck Line 300
290
280
270
260
250
240
230
220
210
200
190
180
Volume (4,008,347)
Lower Still 200000
High
Volume Volume Lower 150000
Volume
100000
50000
x10
March April May June July August September November 1995 February

Exercise
03Hero Honda (F&O) (471.5, 483.8, 469.0, 480.9) 400
HERO HONDA
390
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
A S O N D 2002 M A M J J A S O N D 2003 M A M J J A S O N D 2004 M
 PAGE : 26

12500 01Infy (F&O) (5,260, 5,349, 5,205, 5,329) 12500

12000 INFOSYS WEEKLY LINE CHART 12000
11500 HEAD & SHOULDER PATTERN 11500
11000 11000
10500 10500
10000 10000
9500 9500
9000 9000
8500 8500
8000 8000
7500 7500
7000 7000
6500 6500
6000 6000
5500 5500
5000 5000
4500 4500
4000 4000
3500 3500
3000 3000
2500 2500
2000 2000
1500 1500
1000 1000
500 500
0 0
D 1999 M A M J J A S O N D 2000M A M J J A S O N D 2001M A M J J A S O N D 2002
 PAGE : 27

3.1.2 FINER POINTS :-

i. Volume behavior is very important . A head and shoulder pattern not

following the rules of volume may not be reliable.

ii. Neckline :- It is the line drawn across the bottoms of reactions

between the left shoulder, head and right shoulder.

iii. Breaking the neckilne : The breach of neckline should occur with
force (volume plays very important role here). A technical analyst
should be alert and if the prices tends stay around the neckline and the
downfall is not intensified , there is a chance that the pattern may fail
and prices may start to rise again.
iv. Rising of Falling Neckline : A horizontal neckline is ideal but even
rising or falling neckline can make a successful pattern

v. Multiple Head and Shoulder: This is one variation of the pattern ,

whereby there are multiple left/right shoulder. Generally the number of
left and right shoulders would be equal. This type of pattern is famous
for its symmetricity.
 PAGE : 28

02Bajaj Auto
H (F&O) (877.6, 894.0, 872.2, 890.3) 730
720
710
700
690
680
670
S1 660
S1 650
640
S2 neck line 630
620
610
600
590
580
570
560
550
540
530
520
510
500
490
480
470
460
November 1997 February
March April May June July August September
October

vi. The top price of left and right shoulders may (and usually are) not
be equal.
vii. The Measuring Formula or Target :- In order to determine the
minimum objective of the decline draw a vertical line from the top of
the HEAD to the neckline and reduce the number so derived from the
point at which the price has cut the neckline after completing the right
shoulder .
vii. Inverted Head & Shoulder :- It is just the reverse of Head and
Shoulder pattern . The inverted Head & Shoulder pattern appearance
signifies beginning of a major bull run after its breakout from
neckline.
 PAGE : 29

01TISCO (F&O) (305.00, 305.00, 295.60, 297.75) 140

135
130
125
120
115
110
105
100
Neck Line 95
OPull Back Action 90
Left 85
shoulder Right
Shoulder 80
75
Head 70
65

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1999 Feb Mar Apr

vii. Pull Back Action : After crossing the neckline , the price comes
back and touches the neckline , this is called as pull back action .

viii. One more classic Head & Shoulder pattern on high low bar chart
in Reliance
 PAGE : 30

H 01Reliance (F&O) 220

215
S
210
S
205
200
NECKLINE 195
190
185
180
175
170
165
160
155
150
145
140
135
130
May June July AugustSeptember November 1995 February
March April May

3.2 ROUNDING TOP AND ROUNDING BOTTOM FORMATION

(REVERSAL PATTERN) :-

3.2.i ) ROUNDING TOP :- Rounding Top formation is a phenomenon of

gradual distribution of stocks , over a period of time and is a major
reversal pattern which appears at market top and has bearish implication.
 PAGE : 31

Reckitt & Colman 430

420
ROUNDING TOP FORMATION 410
400
390
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
1997 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1998Feb Mar Apr May Jun

3.2.ii ) ROUNDING BOTTOM :- Rounding Bottoms are commonly

referred to as ‘BOWL’ OR ‘SAUCER’ patterns . The Rounding bottom
pattern appears at the bottom of the market and has bullish implications.
The volume accelerates with the trend and until it often it reaches a sort
of climatic peak in a few days of almost vertical price movement on the
chart . This pattern when they occur after extensive decline are of
outstanding importance for they nearly always denote c change in
Primary trend and an extensive advance yet to come . The tips of the
volume lines at the bottom of the chart when connected , will describe as
arc which often roughly parallels the arc formed by the price BOWL. The
trading volume should ebb to an extreme low at the bottom of a Bowl
pattern if its implications are to be trusted.
 PAGE : 32

00BSE Sensex 30 C (4,961, 4,973, 4,892, 4,963) 4400

ROUNDING BOTTOM FORMATION 4300
4200
4100
4000
3900
3800
3700
3600
3500
3400
3300
3200
3100
3000
2900
2800
2700

April May June July August September

October
November
December
1999 FebruaryMarch
3.3 TRIANGLES :-
3.3.1 SYMMETRICAL TRIANGLES (USUALLY CONTINUATION
PATTERN):
02IPCL (F&O) (150.5, 152.5, 146.5, 149.5)
180
170
2 SYMMETRICAL TRIANGLE
AREA OF DOUBT 160
4 150
140
APEX 130
Q PULL BACK ACTION 120
3 110
1
100
90
80
70
MINIMUM TARGET 60
50
40
30
Volume (900,733) 15000
ERRATIC VOLUME
10000
5000
x100
1996 M A M J J A S O N D 1997 M A M J J A S O N D 1998 M A M J J
 PAGE : 33

Following are the rules of construction of a Symmetric Triangle -

1. It is formed by the price movement such that the successive tops are
lower than the predecessor top , and it fails to attain the height of the
preceding rally and the successive bottoms are higher than the
preceding bottom .
2. The lower tops can be connected by down sloping line and the
higher bottoms can be connected by upsloping line , thus forming a
geometric triangle.
3. The area of triangle is called as Area of Doubt /Area of Congestion .
4. The volume diminished within the triangle
5. Finally the prices breakout from the triangle with significant pickup
in volume . The trend picks up in the direction of the breakout. Within
the triangle it is difficult and even risky to predict the direction of the
breakout - up or down . The formation of Triangle suggests that the
market is uncertain at the moment it is looking for direction .
Generally ( but not necessary ) the breakout is in the direction of the
long term trend , hence the triangles are termed as continuation
patterns.
6. The center of the triangle is called as the Apex.
7. For a valid Triangle formation there should be two alternate tops
and two alternate bottoms . Hence it has four touch points , two touch
points on sown sloping line and two on the upsloping line .
8. For an effective price movement the breakout should occur at a
point somewhere between three & half quarters of the horizontal
distance from the base to the apex. The price movement may be less
effective if the breakout occurs near the point of apex.
9. Quite often pull back action is seen after the price breakout which
means that the prices pull back to touch the boundary lines (either the
 PAGE : 34

upsloping or the down sloping boundary lines depending on the

direction of the breakout.) or even to the Apex.
10. Minimum Price Target : The minimum price target can be
calculated once the prices breakout of a Triangle. Draw a vertical line
from the point of rally to the bottom boundary and measure its points
in terms of price . The minimum target price will be the same number
of points measured from the point of breakout .
11. A trader is expected to take position in the direction of the breakout
and only after the price breaks out from the triangle and not in
anticipation .

3.3.2. ASCENDING - RIGHT ANGLE TRIANGLE.

This pattern is the cousin of Symmetrical triangle . The Ascending
triangle is usually a bullish pattern , since it takes support at higher
levels. All the rules of construction of this pattern are same as
Symmetrical Triangle . The only difference is , instead of the upsloping
boundary line we have almost horizontal boundary line. Usually the
breakout is in the upward direction from the horizontal boundary line ..
 PAGE : 35

01L&T (F&O) (465.0, 497.9, 404.0, 444.5) 330

320
Ascending Triangle 310
300
290
280
270
260
250
240
230
220
Horizontal Upper 210
Boundary 200
190
180
170
160
Upsloping Lower
Boundary Line 150
140

Jun Aug Sep OctNov Dec1993 Mar Apr May Jun Jul AugSep Oct Nov Dec
1994Feb Mar Apr May

3.3.3. DESCENDING - RIGHT ANGLE TRIANGLE.

This pattern is the cousin of Symmetrical triangle . The Descending
triangle is usually a bearish pattern. All the rules of construction of
this pattern are same as Symmetrical Triangle . The only difference is ,
instead of the down sloping boundary line we have almost horizontal
boundary line. Usually the breakout is in the downward direction from
the horizontal boundary line . In fact the formation of an
Ascending/Descending triangle gives an advance warning to the trader
about the direction of the breakout .
 PAGE : 36

Procter & Gamble (401.0, 403.9, 395.0, 400.0) 1450

1400
1350
1300
1250
1200
1150
1100
1050
DESCENDING TRIANGLE 1000
PROCTER & GAMBLE 950
900
850
800
750
700
650
600
550
500
450
400
350
300
250
J J A S OND 2000 AM J J A S ON D2001 A M J J A S ON D2002 A M J J A S OND 2003 A M

3.4. RECTANGLES :-
The Rectangle pattern is one more pattern which is similar to
Symmetric triangle , the primary difference being the shape. As the
name suggests a Rectangle consists of price movements between two
parallel boundaries (horizontal lines) , which may be called as
‘Trading Area’ .
 PAGE : 37

Wipro Ltd (1,527, 1,534, 1,475, 1,480) 1050

1000
950
900
850
800
750
700
650
600
550
500
RECTANGLE
450
400
350
300
250
200
150
100
50
0
S O N D 1998 M A M J J A S O N D 1999 M A M J

A slightly sloping lines may be considered to be a valid Rectangle ,

see .
Pfizer Ltd (390.0, 394.0, 385.0, 387.6)
300

250

200

150

100

RECTANGLE WITH DOWN SLOPING BOUNDARIE

50

Volume (11,775)
50000
x10
1991 1992 1993 1994 1995
 PAGE : 38

The formation of a Rectangle suggests balance in the market. The

price movement between the two boundaries also suggests perfect
balancing of force of the two opposite groups , the bulls and the bears.
Ultimately the strong party kicks off the ball out of the rectangle ,
which we call as breakout, and the trend picks up in the direction of
the breakout .The volume diminishes as the price moves within the
rectangle and it picks up after the breakout. Quite often we see a pull
back action which brings the prices back to touch the boundaries.
Rectangles appear more frequently at the bottom rather than at the top.
Measuring implication :- The minimum target is given by the width of
the rectangle . The prices can be expected to go us much points from
the boundary of breakout as the distance between the two boundaries.
Appearance of Rectangle is relatively rare.
3.5. DOUBLE AND TRIPLE TOPS & BOTTOMS (MAJOR
REVERSAL PATTERN):-
3.5.1 : DOUBLE TOP & DOUBLE BOTTOM :-

Tata Iron & Steel (310.0, 310.0, 288.5, 290.0)

DOUBLE TOP
T1 T2
450

400
valley bottom
350

300

250

200

150

100
Oct Nov Dec 2003FebMar Apr May Jun Jul Aug Sep Oct Nov Dec 2004FebMar Apr May Jun
 PAGE : 39

B S E S Ltd (536.6, 559.0, 536.6, 547.4)

DOUBLE TOP T1 T2 850
800
750
700
valley 650
bottom
600
550
500
450
400
350
300
250
200
150
30000
20000
10000
x100
AugSepOct NovDec2003 MarApr MayJun Jul AugSepOct NovDec2004 Mar Apr MayJun

DOUBLE BOTTOM :-

01L&T (F&O) (465.0, 497.9, 404.0, 444.5) 430

420
410
400
390
DOUBLE BOTTOM 380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
160
150
B1 B2 140
130
120
A S O N D 1997M A M J J A S O N D 1998M A M J J A S O N D 1999M A M J J A S O
 PAGE : 40

1. The prices of the scrip rises to a certain level with high volume and
then recedes with lower volume . Again activity picks up and the prices
starts rising with high volume , and reaches almost the same level , but
this time the volume is relatively lower as compared to the first top ,
thereafter the prices starts declining .Double bottom is the same
picture but upside down and having reverse implication . In case if two
tops are formed very close to each other there is a suspicion that it may
not be double top .
2. For a reliable pattern there should be time lag of 3 to 4 weeks
between the tops and the prices reduces by 20 % of the top value .The
time element is more important than the price decline for the formation
of a reliable double top.
3. Double Tops and bottoms are primarily reversal phenomenon. The
double top is said to be confirmed when the price breaks the bottom of
the valley (formed at the time of first decline ) and a technical analyst
should take position only after the price breaks the point of valley and
not in anticipation .
4. Double Tops are called as “ M “ formations and Double bottom are
called as “W” formations.

3.5.2 : TRIPLE TOPS AND TRIPLE BOTTOMS

1. The Triple tops and Triple bottoms belong to the family of Double
Tops and double bottoms . They are major trend reversal patterns. As
the name suggests there are three tops in a Triple Top formation and
three bottoms for Triple bottom formation . In the Triple Top
formation the three tops are widely spaced and quite deep and usually
rounding reactions (valley) between them . Volume declines
comparatively on the second advance and declines still furthur on the
 PAGE : 41

third advance . The three tops may not be exactly equal , a

filter/tolerance limit of 1% or 2% may be allowed . The three tops
may not be spaced equally , also the intervening valleys need not
bottom out at exactly the same level , the first may be shallower than
the second and vice versa. It is practically difficult to lay down tight
rules for the interpretation of a triple top but any chartist with
reasonable experience should be able to identify triple top/bottom
immediately . The pattern is complete and one can take position only
when the price breaks down through the level of the valley floor (the
lower one , if the two valleys form at different levels ). Triple bottoms
are just upside down picture of Triple tops formation.

Bharat Petroleum (360.0, 360.0, 338.7, 349.5) 550

TRIPLE TOP T1 T2 T3
500

450

400

350

300

250

200

150
Volume (342,584) 600000
500000
400000
300000
200000
100000
x10
D 2002 M A M J J A S O N D 2003 M A M J J A S O N D 2004 M A M J
 PAGE : 42

Tata Engg & Loc (394.0, 416.4, 391.4, 393.5) 600

TRIPLE BOTTOM 550

500

450

400

350

300

250

200

150

100

B1 B2 B3 50

1999 2000 2001 2002 2003 2004

3.6 THE BROADENING FORMATIONS :-

3.6.1 : The Broadening Formation :-

ITC Ltd (895.0, 895.0, 870.0, 884.5)
BROADENING TRIANGLE PATTERN
850

800

750

700

650

600

550

September
OctoberNovember
December
1998 February
March April May June July August
 PAGE : 43

1. The boundaries of the Broadening Formations widen out and

diverges from each other. It is just reverse of a Triangle and hence
often referred to as the “Inverted Triangles “ . The Broadening
Formations suggests a market lacking intelligent sponsorship and out
of control . They are bearish in purport suggesting that the situations is
nevertheless approaching dangerous stage. They appear most often at
or near an important topping out of trend.
2. The volume is high and erratic , making the whole picture - price
and volume both , one of wild and apparently “unintelligent swings “
3. The market is expected to move in the direction of the breakout ,
usually downwards.
4. There are no broadening Bottom formation . This pattern is typically
seen at the top.
5. Like in all other patterns one should trade only when prices breakout
from the pattern.
i. The Right Angled Broadening Formation:
Hindustan L ever Ltd (128.00, 129.75
RIGHT, 127.85,
ANGLED128 .90)
BROADENING PATTERN
170

165

160

155

150

145

140

135

130

125

120
15 22 29 5 12 19 27 9 16 23 2 9 16 23 30 6 13 20 27 12 18 25 1 8 15 22
Decemb er 1998 Feb ruary March April May June
 PAGE : 44

The Right Angled Broadening Formation belongs to the family of

broadening formations. This pattern consists of horizontal top/lower
boundary and downsloping lower/top boundary. They carry bearish
implication regardless of which side is horizontal .

3.7 THE DIAMOND :

ABB 490
DIAMON PATTERN 480
470
460
450
440
430
420
410
400
390
380
370
360
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
July August September
OctoberNovember
December
1999 FebruaryMarch April May June

1. As the name suggests the shape of the formation is like diamond. The
diamond reversal pattern might be described either as a complex Head &
Shoulders with a V - shaped neckline OR as a Broadening formation
which goes furthur to form a Symmetrical Triangle . IT is not a common
pattern.
2. It rarely occurs at the bottom as its natural habitat is major tops , and it
is a Major reversal pattern usually at the top.

3.8 THE WEDGE -(RISING WEDGE & FALLING WEDGE :-

 PAGE : 45

RISING WEDGE - FALLING PRICES ON BSE30 4800

4700
4600
4500
4400
4300
4200
4100
4000
3900
3800
3700
3600
3500
3400
3300
3200
3100
3000
2900
2800
2700
2600
2500
2400
2300
2200
2100
2000
D 1993M A M J J A S O N D1994 M A M J J A S O N D 1995M A M J J A S O N D 1996

Nestle (India) (642.0, 652.0, 641.1, 650.1) 350

345
340
335
FALLING WEDGE - RISING PRICES 330
325
320
315
310
305
300
295
290
285
280
275
270
265
260
255
250
245
240
235
230
225
220
215
210
205
200
February
March April May June July AugustSeptember November 1998 February
March

1. The wedge is chart formation in which the price fluctuations are

confined within converging boundaries and both the boundaries are either
upsloping are downsloping .The wedge formation which is made up of
 PAGE : 46

rising upsloping boundaries is called as Rising Wedge and the now with
downsloping boundaries is called as falling wedge. The Rising Wedge
has bearish implication and the Falling Wedge has bullish implication .

2. When the prices breakout from the Rising Wedge , the prices go down
and when the prices breakout from the falling wedge the prices go up.
The Wedge formation are usually not Major Trend reversal. However
classic wedges are seen right at the top of the market acting as a major
trend reversal , as seen on BSE 30 in Sept 94.
3. The volume diminishes as the prices gradually moves towards the apex
of the wedge.

3.9 FLAGS (CONTINUATION PATTERN ONLY )

Dabur India Ltd (86.50, 91.80, 86.25, 91.05) 95

90
FLAG FORMATION
85
80
75
70
65
60
55
50
45
40
35
30
Volume (796,784) 10000
5000
x100
February
March April May June July August September
October November
December2004

REVERSE FLAG :-
 PAGE : 47

01SBI (F&O) (443.3, 453.3, 429.8, 449.1) 370

360
SBI 350
REVERSE FLAG 340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
April May June July August September
October November
December1998 February

1. A Flag looks like a flag on the chart . It can be described as a small

compact parallelogram of price fluctuations or tilted rectangle which
slopes back moderately against the trend . Flags appearing like
downsloping rectangle are seen in an uptrend while upsloping flags are
seen in an downtrend.
2. The volume shrinks markedly and constantly as the pattern develops .
3. The flag should occur after a straight line move , and looks like half
mast since it develops almost in the middle of the trend.
4. Usually the time taken within the flag is 3 to 4 weeks i.e the price
should break out within four weeks time . Any pattern which extends
beyond 4 weeks should be watched with suspect.
5. The flag is a Continuation pattern only .
6. The minimum measuring implication :- The price is expected to reach
at least the same number of points from the breakout as measured from
the bottom of the trend from where the trend begin , till the point from
where the flag started to form .
 PAGE : 48

7. The flags rarely fail in their implication . They are most dependable
patterns.

3.10 THE PENNANT - A POINTED FLAG ( CONTINUATION

PATTERN ONLY )

Great Eastern Shipping (142.5, 144.8, 140.6, 141.7)

140
135
PENNANT FORMATION 130
125
120
115
110
105
100
95
90
85
80
75
70
65
60
55
50
45

2003 February
March April May June July AugustSeptember November 2004

1. The Pennant is similar to flag , the only difference between a pennant

and the flag, is that , the former is bounded by converging boundary lines
rather than parallel lines. It can be described as short compact Wedge.
2. The Pennant is a small compact sloping triangle . It slants down when
it appears in an uptrend and up in an down trend .
3. All other rules of construction are similar to that of a flag, like it forms
after rapid advance or decline , volume shrinks during the formations, It
has the same measuring implications , time period of formations etc.

COMMON FACTORS WITH ALMOST ALL PATTERNS :-

 PAGE : 49

1. Trade only in the direction of breakout and not in anticipation .

2. Usually prices will pull back on to the upper side of boundaries.
3. Volume Shrinks during within the pattern.
4. There are minimum four to five points of contact at the boundaries .
 PAGE : 50

CHAPTER 4. GAPS

A gap is a chart pattern that consists of two adjacent bars, where the low of one
bar is higher than the high of the previous bar. It shows that no trades took place
at a certain price. Gaps occur when prices jump in response to a sudden
imbalance of demand and supply .
All gaps can be divided into four major groups
1. Common gaps 2. Breakaway gaps 3. Continuation gaps 4. Exhaustion gaps.
One needs to identify them since each of them has different implication and
calls for different trading tactics.

4.1. COMMON GAPS :-

3950
3900
3850
3800
3750
3700
3650
* 3600
3550
3500
3450
3400
3350
* *
** *
3300
3250
* * 3200
3150
* * 3100
3050
3000
*** 2950
2900
2850
* 2800
2750
2700
* 2650
2600
2550
2500
Jul AugSepOctNovDec2002 MarApr MayJunJul AugSepOctNovDec2003 MarAprMayJunJul Aug

Common gaps are rapidly closed that is prices return into the gap within
a few days . Common gaps occur within a trading area or price
 PAGE : 51

congestion pattern like within a Triangle or Rectangle . Their appearance

implies that a congestion formation is in process of construction.
Common gaps are more apt to develop in consolidation patterns rather
than reversal patterns. Common gaps gives more creditability to the
pattern formation .

4.2 BREAKAWAY GAPS :-

BSE Sensex 30 C (5,487, 5,556, 5,487, 5,541) 3850

3800
3750
3700
3650
3600
3550
3500
3450
3400
3350
3300
* 3250
3200
3150
3100
3050
3000
2950
2900
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* = Breakaway Gap 2650
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JunJul AugSep NovDec2002 MarApr MayJunJul AugSepOctNovDec2003 MarAprMayJunJul

A breakaway gap occurs when the prices leap out of a congestion zone on
heavy volume and begin a new trend . A breakaway gap can remain open
for weeks, months or even years. The breakaway gap is followed by high
volume and fast price movement in the direction of the breakout . The
breakout gaps signifies a major change in mass mentality .

4.3 CONTINUATION GAPS OR RUNAWAY GAPS

 PAGE : 52

BSE Sensex 30 C (5,487, 5,556, 5,487, 5,541) 4400

4350
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* 3850
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29 5 12 19 27 2 9 16 23 2 9 16 23 30 6 13 20 27 4 12 18 25
1998 February March April May

A Continuation gap occurs in the midst of a powerful trend , which

continues to reach new highs or new lows without filling the gap. It
occurs in the middle of the trend . Its inference is that , prices will go as
much farther beyond the gap as they have already gone between the
beginning of the move and the gap as measured directly and vertically on
the chart. High volume confirms the gap.

4.4 EXHAUSTION GAPS

The Exhaustion gaps are associated with rapid advances or declines. An
Exhaustion gap is not followed by new highs during uptrends or new
lows during down trends - prices churn and then return into the gap and
close it. Exhaustion gaps appear at the end of trends. Prices rise or fall for
several weeks or months and then gap in the direction of the trend . At
 PAGE : 53

first an exhaustion gap looks like a continuation gap - a leap in the

direction of the trend on heavy volume . If prices fail to reach new highs
or lows for several days after the gap , it is probably an exhaustion gap.
An exhaustion gap is confirmed only when prices reverse and close it.

4.5 ISLAND REVERSAL

01TELCO (F&O) (392.0, 404.4, 384.0, 401.9) 300

ISLAND REVERSAL 290
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May June July August SeptemberOctober November December1999
 PAGE : 54

03Wipro Ltd (F&O) (1,487, 1,509, 1,471, 1,504)

9500
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ISLAND REVERSAL 8500
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Aug Sep Oct Nov Dec 2000Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2001Feb

The Island Reversal is not common and it is not of major significance in

the sense that it does not signal major trend reversal , but it send the
prices back for a complete retracement of the move which preceded it. An
island reversal is described as a compact trading range separated from the
move which led to it by a gap and from the move is the opposite direction
which follows it by a breakaway gap. The gaps at either end occur at the
same level , such that the whole area stands out as an island on the chart ,
isolated by the gaps . If the trading range of an island reversal is one day
only , it is called as One Day Island Reversal.
 PAGE : 55

3550
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16 23 30 7 14 21 28 4 11 18 25 1 8
December 1999 February
 PAGE : 56

CHAPTER 5 : TRENDLINES & TRENDCHANNELS

5.1 TRENDLINES :-
00BSE Sensex 30 C (5,487, 5,556, 5,487, 5,541) 4200
4150
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uplsoping trendline 4000
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December
1996 February March April May June July August

02Colgate (116.7, 116.7, 114.3, 114.5)

390
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M J J A S O N D 1997M A M J J A S O N D 1998 A M J J A S ON D 1999M A M J J A S
 PAGE : 57

AS we have understood so far that prices move in Trends , and amazingly

and quite frequently the Primary as well as secondary trends appear on
the charts as though their courses had been plotted with a straight edge
ruler . This phenomenon is in truth the most fascinating , impressive and
mysterious of all the stock charts .

How To Draw Trendlines : In an uptrend the trend line(s) ( straight line)

is drawn connecting the bottom tips while in an downtrend the trendline
is drawn connecting the upper tips of the swing. Trendlines can be
drawn connecting tips of Primary or Secondary or Minor Swings having
the same time frame implication.
TECHNICAL INTERPRETATION OF TRENDLINES :-
1.NUMBER OF CONTACTS : The greater number of bottoms that have
developed at or very near a trendline in the course of a series of waves ,
the greater the importance of that line . With each successive test the
significance of the line increases. A first and tentative uptrendline can be
drawn as soon as two bottoms have formed , the second higher than the
first , but if prices move back to that line a third time , make a third
bottom there and start a renewed advance , then the validity of that line
as a true definition of the trend has been confirmed by the action of the
market .
2. THE LENGTH (IN TERMS OF TIME) OF LINE :The length of the
line , i.e. the longer, in terms of time it has held without being penetrated
downside by the prices , the greater its technical significance .
3. THE ANGLE :The angle of the trendline is also one of the criterion
of analyzing trendlines. If the angle of the trendline is flatter i.e. not steep
and breach of such trendline is considered to be significant so that the
prices are expected to move down/up substantially . While breach of a
 PAGE : 58

steep trendline may not be that significant , and the market may move
sidewise thereafter.
4. FILTER : Generally one should use filter before taking decision based
on breach of trendline . It means , if the prices breaks any trendline and
closes 1 % to 3 % ( the exact level of filter % has to be determined by
any individual analyst based on his experience) below the point of
breach , one can take position based on such signal. A trendline is not a
glass floor under the market - one crack and it is gone. It is more like
fence that bulls or bears can lean on. They can even violate it without
toppling it, the way animals shake fence.
5. VOLUME :. If the trendline is broken with force in terms of price
movement coupled with high volume , such breach are significant and a
technical analyst can be confident in taking position . This is additional
evidence
6. WHIPSAW : If on a particular day the trendline is broken and
immediately on the second day the market reverses and the price closes
above the trendline , a technical analyst may use stop loss . Or one may
wait for one or two days and see whether the prices remain below the
trendline before taking any trading position . However in that case one
may have to loose certain amount of profits . Usually whichever
technique any analyst is using there is always a trade off between
timings and level of profits.
7. PULLBACK ACTION : Very frequently we see pull back action .
After the trendline is broken , the prices pull back and touches the
trendline from bottom , and then it again resumes its downward journey.
This is an excellent opportunity to go short .
 PAGE : 59

MACD (-27.58)

01SBI (F&O) (480.0, 480.0, 465.8, 468.3)

T1 700
T2
650
600
550
B1
500
450
B2
400
350
300
250
200
2002 AugSepOctNovDec2003 MarAprMayJunJul AugSepOct NovDec2004 MarAprMayJun

MACD (-12.88)
20
10
0
-10
-20

01TISCO (F&O) (295.0, 318.0, 294.0, 315.5)

T1 T2
450
T3
400
B1
B2 350

300

B3 250

200

150

100
2002 AugSepOctNovDec2003 MarAprMayJunJul AugSepOct NovDec2004 MarAprMayJun
 PAGE : 60

5.2 TRENDCHANNELS :-
4700
TREND CHANNEL 4650
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June July August September
OctoberNovember
December1998 FebruaryMarch April

A trendchannel consists of two parallel lines that contain prices.

Trendline channels can drawn connecting the tops and bottoms of the
prices. It resembles long Rectangles (downsloping/upsloping) like
formation .
5.3 FAN TRENDLINES :-
Fan Trendlines are three trendlines drawn from any important trough or
peak. It is observed that quiet often market changes its long term trend
after crossing the third fan trendline . In the one can see the scrip BSES
becoming long term bullish after it crosses the third fan trendline F3.
 PAGE : 61

02BSES (F&O) (550.0, 554.0, 529.0, 546.9) 270

265
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F1 F2 115
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Jun Jul AugSep Oct NovDec1995 Mar AprMay Jun Jul AugSep OctNov Dec1996Feb MarApr
 PAGE : 62

CHAPTER 6 : VOLUME OBSERVATION :-

In the earlier chapters ,number of times mention has been made about
volume behaviour , for example volume should shrink during the pattern
formation or volume should increase on breakout etc. Volume behaviour
is extremely important for proper interpretation of any charts.
The following are some broad rules for Volume interpretation .
1. Rising Volume and Price are a normal phenomenon. This combination
indicates that the market is in Gear and has no forecasting value .
Consequently if the two are in gear it is reasonable to expect at least one
more rally that reaches a new price high .
2. Volume normally leads price. A new high in price that is not confirmed
by volume should be regarded as a red flag and a warning that the
prevailing trend may be about to reverse .
01Reliance (F&O) 230
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Volume (2,380,694) 500000
VOLUME BARS 450000
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x10
Mar Apr MayJun Jul AugSep OctNovDec
1994 Mar Apr May Jun Jul AugSep Oct NovDec
 PAGE : 63

3. Rising prices and falling volume are abnormal and indicate a weak and
suspect rally . Volume measures the enthusiasm of buyers relative to
sellers . Consequently rising prices and declining volume indicate that the
market is rallying because of a lack of selling pressure not because buyers
are enthusiastic .
4. A parabolic rise in prices and a sharp increase in volume are
unsustainable and eventually will result in an exhaustion move .
Exhaustion is characteristic of an important market turning point.
Videocon International (31.45, 31.85, 31.45, 31.65) 170
160
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MayJun Jul AugSep OctNovDec1998 MarApr MayJun Jul AugSep OctNovDec1999 MarApr

5. The reverse set of circumstances epitomizes a selling climax . The

implications and principles for a buying panic hold for a selling climax ,
but in this case the trend reverses from down to top.
6. When a test of an important low is accompanied by lower volume , this
is a bullish sign. Never short a dull market.
7. Record volume at any high or low may be indicate a change in trend .
 PAGE : 64

Volume behaviour should be used as additional evidence for the purpose

of interpretation of any chart , that is to say , volume behaviour is
secondary to Price behaviour, since Price is supreme . The trend is always
indicated by Price and not only by volume. Volume should be used only
for confirmation .
 PAGE : 65

CHAPTER 7 : MOVING AVERAGES :-

7.1 ORIGIN :

Wall Street old- timers claim that moving averages were brought to
financial markets by antiaircraft gunners. They used moving averages to
site guns on enemy planes during World War II and applied this method
to prices. The two early experts on moving averages were Richard
Donchian and J.M. Hurst.

7.2 DEFINITION AND FORMULA :-

A moving average is a statistical device which smoothens out the erratic

price fluctuations and gives us a smooth curve indicating the direction of
the trend .A moving average (MA) shows the average value of data in its
time window. A 5-day MA shows the average price for the past 5 days, a
20 day MA shows the average price for the past 20 days, and so on.
When you connect each day’s MA values, you create a moving average
line.

P1 + P2 + ……… P n
Simple MA=

Where P is the price being averaged

N is the number of days in the moving average (Selected by
trader)

The value of MA depends on two factors: values that are being averaged
and the width of the MA time window, Suppose you want to calculate a 3
Day simple moving average of a stock. If it closes at 19,21 and 20 on
three consecutive days, then a 3 day simple MA of closing prices is 20
 PAGE : 66

(19+21+20 , divided by 3). Suppose that on the fourth day the stock
closes at 22. It makes it 3-day MA rise to 21-the average of last three
days (21+20+22), divided by 3.

7.3 TYPES OF MOVING AVERAGE :-

There are three main types of moving averages: simple, exponential, and
weighted, Many traders use simple MA‘s because they are easy to
calculate, and Donchian and Hurst used them in precomputer days.
7.3.1: SIMPLE MOVING AVERAGE :-
A simple MA changes twice in response to each piece of data. First, it
changes when a new piece of data is added to the moving average.
That is good -we want our MA to reflect changes in prices. The bad
thing is that MA changes again when an old price is dropped off at the
end of the moving average window. When a high price is dropped, a
simple MA ticks down. When a low price is dropped, a simple MA
rises. Those changes have nothing to do with current reality of the
market.
Imagine that a stock hovers between 80 and 90, and its 10 day simple
MA stands at 85 but includes one day when the stock reached 105.
When that high number is dropped at the end of the 10 day window,
the MA dives, as if in a downtrend. That meaningless dive has nothing
to do with the current reality of the market.
When an old piece of data gets dropped off, a simple moving average
jumps. A simple MA is like a guard dog that barks twice- once when
someone walks away from it. You do not know when to believe that
dog. Traders use simple MA s out inertia. A modern computerized
trader is better off using exponential moving averages.
7.3.2 :EXPONENTIAL MOVING AVERAGES :-
 PAGE : 67

An exponential moving average (EMA) is a better trend-following tool

than a simple MA. It gives greater weight to the latest data and
responds to changes faster than a simple MA. At the same time , an
EMA does not jump in response to old data.This guard dog has better
ears, and it barks only when someone approaches the house.

EMA= P * K+EMA * (1-K)

tod yest

where K = 2
N+1

N= the number of days in the EMA (chosen by the trader)

P = today’s price
tod
EMA = the EMA of yesterday
yest

Technical analysis software allows you to select the EMA length and
calculate it a push of key.To do it by hand, follow these steps.

1. Choose the EMA length.Let us say, we want a 10 day EMA.

2. Calculate the coefficient K for that length. For example, if you want
a 10 day EMA, k equals 2 divided 10+1. or 0.18.
3. Calculate a simple MA for the first 10 days -add closing prices and
divide the sum by 10.
4. On the 11th day, multiply the closing price by K, multiply the
previous day’s MA by (1-K), and add the two,The result is the 10 day
EMA.
5. Keep repeating step 4 on each subsequent day to obtain the latest
EMA . An EMA has two major advantages over a simple MA. First, it
assigns greater weight to the last trading day. The latest mood of the
 PAGE : 68

crowd is more important. In a 10 day EMA, the last closing price is

responsible for 18 percent of EMA value, while in a simple MA all
days are equal. Second ,EMA does not drop old data the way a simple
MA does.Old data slowly fades away, like a mood of the past lingering
in a composite photo .

4150
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November 1996 February
March April May June July August September November

7.4 :CHOOSING THE LENGTH OF A MOVING AVERAGE :

A relatively short EMA is more sensitive to price changes - it allows
you to catch new trends sooner. It also changes its direction more often
and produces more whipsaws. A
whipsaw is a rapid reversal of a trading signal. A relatively long EMA
leads to fewer whipsaws but misses turning by a wider margin.
When computers first became available, traders crunched numbers to
find the “best” moving averages for different markets. They found
which MA s worked in the past- but it did not help them trade because
markets kept changing.
 PAGE : 69

Finally, traders can fall back on a simple rule of thumb: The longer the
trend you are trying to catch, the longer the moving average you need.
You need a bigger fishing rod to catch a bigger fish. A 200 days
moving average works for long-term stock investors who want to ride
major trends. Most traders can use an EMA between 10 and 20 days A
moving average should not be shorter than 8 days to avoid defeating
its purpose as a trend following tool.

7.5 :MARKET PSYCHOLOGY :-

Each price is a snapshot of the current mass consensus of value .A single
price does not tell you whether the crowd is bullish or bearish- just as a
single photo does not tell you whether a person is an optimist or a
pessimist. If, on the other hand, someone brings ten photos of a person to
a lab and gets a composite picture, it will reveal that person’s typical
features. If you update a composite photo each day, you can monitor
trends in that person’s mood.
A moving average is a composite photograph of the market- it combines
prices for several days. The market consists of huge crowds, and a
moving average indentifies the direction of mass movement.
The most important message of a moving average is the direction of its
slope. When it rises, it shows that the crowd is becoming more optimistic-
bullish. When it falls it shows that the crowd is becoming more
pessimistic- bearish. When the crowd is more bullish than before, prices
rise above a moving average. When the crowd is more bearish than
before, prices fall below a moving average.

7.6 :TRADING RULES :-

 PAGE : 70

Moving averages help us to trade in the direction of the trend. The single
most important message of a moving average is the direction of its slope.
It shows the direction of the market’s inertia.
1. When an MA rises, trade that market from the long side. Buy when
prices dip near or slightly below the moving average. The market gets
support on a rising moving average.
2. When the MA falls, trade that market from the short side. Sell short
when prices rally toward or slightly above the MA. The market faces
resistance at falling moving average.
3. When the MA goes flat and only wiggle a little, it identifies an aimless,
directionless and trendless market.
A trader must accept that an EMA like any other trading tool, has good
and bad sides.
Moving averages help you identify and follow trends, but they lead to
whipsaws to trading ranges.
7.7 :MORE ON MOVING AVERAGES :-
Moving averages serve as support and resistance zones A rising MA
tend to serve as a floor below prices, and a falling MA serves as a ceiling
above them. That’s why it pays to buy near a rising MA, and sell short
near a falling MA.
Moving averages can be applied to indicators as well as prices. Some
traders use a 5 day moving average of volume. When volume falls below
its 5 day MA. it shows reduced public interest in the minor trend , which
is likely to reverse. When volume overshoots its MA, it shows strong
public interest and confirms the price trend.
Moving averages can be based not only on closing prices but also on the
mean between the high and the low.
An exponential moving average assigns greater weight to the latest day
trading, but a weighted moving average (WMA) allows you to assign any
 PAGE : 71

weight to any day, depending on what you deem important. WMA s are
so complicated that traders are better off using EMA s.
7.8 :MOVING AVERAGE CONVERGENCE DIVERGENCE (MACD)
AND MACD HISTOGRAM :-
Moving averages identify trends by filtering out daily price ripples. A
more advanced indicator was constructed by Gerald Appel, an analyst
and money manager in New York. Moving Average Convergence-
Divergence, or MACD for short, consists not of one, but three
exponential moving averages. It appears on the Charts as two lines whose
crossovers give trading signals.
7.8.1 : HOW TO CREATE MACD :
The original MACD indicator consist of two lines: a solid line (called
the MACD line) and a dashed line (Called the Signal line). The MACD
line is made up of two exponential moving averages (EMAs). It
responds to changes in prices relatively quickly. The Signal line is
made up of the MACD line smoothed with another EMA. It responds
to changes in prices more slowly.
Buy and sell signals are given when the fast MACD line crosses above
or below the slow Signal line. The MACD indicator is included in most
programs for technical analysis. Few traders calculate it by hand- a
computer does the job faster and more accurately.
To create MACD:
1. Calculate a 12 day EMA of closing prices
2. Calculate a 26 day EMA of closing prices
3. Subtract the 26 day EMA from the 12 day EMA and plot their
difference as a solid line. This is the fast MACD line.
4. Calculate a 9 day EMA of the fast line, and plot the result as a
dashed line. This is the slow Signal line.
 PAGE : 72

150

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November 1996 February
March April May June July August September November

7.8.2 :MARKET PSYCHOLOGY :-

Each price reflects the consensus of Value among the mass of Market
participants at the moment of the trade A moving average represents
an average consensus of value in a selected period a composite photo
of mass consensus.
Crossovers of the MACD and Signal lines identify shifts in the balance
of power of bulls and bears. The fast MACD line reflects mass
consensus over a shorter period. The slow Signal line reflects mass
consensus over a long period. When the fast MACD line rises above
the slow Signal line, it shows that bulls dominate the market, and it is
better to trade from the long side When the fast line falls below the
slow line, it shows that bears dominate the market and pays to trade
from the short side.
7.8.3: TRADING RULES :-
 PAGE : 73

Crossovers between MACD and Signal lines identify changing market

tides. Trading in the direction of a crossover means going with the
flow of the market. This system generates fewer trades and whipsaws
than a mechanical system based on a single moving average.
1. When the fast MACD line crosses above the Signal line, it gives a
buy signal.
2. When the fast line crosses below the slow line, it gives a sell signal.
Go short .
Many traders try to optimize MACD by using other moving averages
than the standard 12-26-,and 9-bar EMA s; 5-34-7 is another popular
choice. Beware of optimizing MACD too often.
7.9: MACD HISTOGAM :-
7.10.1 DEFINITION & FORMULA :
MACD Histogram offers a deeper insight into the balance of power
between bulls and bears. It shows not only whether bulls or bears are
in control but also whether they are growing stronger or weaker.
MACD- Histogram = MACD line- Signal line
MACD Histogram measures the difference between the MACD line
and the Signal line. It plots the difference as a histogram- a series of
vertical bars.
If the fast line is above the slow line, MACD-Histogram is positive and
plotted above the Zero line. If the fast line is below the slow line,
MACD Histogram is negative and plotted below the zero line. When
the two lines touch MACD Histogram equals zero.
When the spread between the MACD and Signal lines increase MACD
Histogram becomes taller or deeper, depending on its direction. When
the two lines draw closer, MACD Histogram becomes shorter.
The slope of MACD Histogram is defined by the relationship between
any two neighbouring bars. If the last bar is higher (like the height of
 PAGE : 74

letters m-M). the slope of MACD Histogram is up. If the last bar is
lower (like the depth of letters P=p), then the slope of MACD
Histogram is down.
150

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November 1996 February
March April May June July August September November

7.9.2 :MARKET PSYCHOLOGY :-

MACD Histogram shows the difference between long-term and short
term consensus of value. The fast MACD line reflects market
consensus over a shorter period. The slow Signal line reflects markets
consensus over a longer period .MACD Histogram tracks the
difference between these two lines.
The slope of MACD Histogram identifies the dominant market group.
A rising MACD Histogram shows that bulls are becoming stronger. A
falling MACD Histogram shows that bears are becoming stronger.
When the fast MACD line rallies faster than the slow Signal line,
MACD Histogram rises. It shows that bulls are becoming stronger than
they have been , it is a good time to trade from the long side. When the
 PAGE : 75

fast MACD line drops faster than the slow line, MACD Histogram
falls. It shows that bears are becoming stronger- it is a good time to
trade from the short side.
The best sell signals are given when MACD Histogram is above its
centerline but its slope turns down, showing that bulls have become
exhausted. The best buy signals occur when MACD Histogram is
below its centerline but its slope turns up, showing the bears have
become exhausted.
7.9.3. :TRADING RULES :-
MACD Histogram gives two type of trading Signals. One is common
and occurs at every price bar. The other is rare and occurs only a few
times a year in any market but it is extremely strong.
The common signal is given by the slope of MACD Histogram. When
the current bar is higher than the preceding bar, the slope is up. It
shows that bulls are in control and it is time to buy. When the current
bar is lower than the preceding bar, the slope is down. It shows that
bears are in control and it is time to be short. When prices go one way
but MACD Histogram moves the other way, it shows that the dominant
crowd is losing it enthusiasm and the trend is weaker than it appears.
1. Buy when MACD Histogram stops falling and ticks up.
2. Sell short when MACD Histogram stops rising and ticks down.
MACD Histogram ticks up and down on the daily charts so often that
is not practical to buy and sell every time it turns. The changes of slope
of MACD Histograms are much more meaningful on the weekly
charts,
When MACD Histogram reaches a new high during a rally, the
uptrend is healthy and you can expect the next rally to reset or exceed
its previous peak. If MACD Histogram falls to a new low during a
 PAGE : 76

downtrend, it shows that bears are strong and prices are likely to reset
or exceed their latest low.
7.9.4: DIVERGENCES :THE STRONGER SIGNAL IN TECHNICAL
ANALYSIS :-
Divergences between MACD-Histogram and prices occur only a few
times a year in any given market, but they give some of the most
powerful messages in technical analysis. There divergences identify
major turning points and give “Extra strength” buy or sell signals They
do not occur at every important top and bottom, but when you see one,
you know that a major reversal is probably at hand.
When prices rally to a new high, but MACD Histogram traces a lower
top, it creates a bearish divergence . A lower top in MACD Histogram
shows that bulls are internally weak even though prices are higher.
when bulls are running out of steam bears are ready to grab control.
Bearish divergences between MACD Histogram and prices identify
weakness at market tops, They give sell signals when most traders feel
excited about a breakout to a new high !
1. Sell short when MACD Histogram ticks down from its second,
lower top, while prices are at a new high.
As long as prices keep falling to new lows and MACD Histogram
keeps going lower, it confirms the downtrend. If prices falls to a new
low but MACD Histogram traces a more shallow low, it creates a
bullish divergence. It shows that prices are falling out of inertia, bears
are weaker than they seem, and bulls are ready to gain control, Bullish
divergences between MACD Histogram and prices identify strength at
market bottoms. They give buy signals when most traders feel fearful
about a breakdown to a new low .
2. Buy when MACD Histogram ticks up from its second more shallow
bottom while prices are at a new low.
 PAGE : 77

7.9.5 :MORE ON MACD HISTOGRAM :

MACD-Histogram works in any timeframe; weekly daily, and
intraday. The signals of weekly MACD Histogram lead to greater price
moves than the daily or intraday indicators. This principal applies to all
indicators- Signals in longer timeframes lead to greater price moves.
 PAGE : 78

CHAPTER 8 : MOMENTUM INDICATORS :-

8.1 :INTRODUCTION & BASIC CONCEPTS OF MOMENTUM
INDICATORS :-

8.1.1 : INTRODUCTION :-

Technical indicators are divided into three main groups. Trend

following indicators, help identify trends, Oscillators - help find
turning points & Miscellaneous indicators such as the New High-New
Low Index or Advance Decline ratios tracks general changes in mass
psychology.
Oscillators identify the emotional extremes of market crowds. When
greed or fear grips a mass of traders, the crowd surges - Oscillators
measure the speed of the surge and track its momentum. If a ball is
thrown up, when it leaves your hand it has the highest speed, when it
goes still furthur up , though it continues to go up it goes with a lower
speed , and it has the lowest speed at the top , and then it takes turn and
starts falling down. Oscillators allow you to find unsustainable levels
of optimism and pessimism. Professionals tend to fade those extremes.
They bet against them, for a return to normalcy. When the market rises
and the crowd gets up on its hind legs and roars from greed,
professionals sell short and they buy when the market falls and the
crowd howls in fear. Oscillators help them to time those trades.

8.1.2 :OVERBOUGHT AND OVERSOLD :-

Martin Pring compares trend following indicators and oscillators to the
footprints of a man walking his dog on a leash. The man leaves a fairly
straight trail- like a trend-following indicator. The dog’s trail swings
right and left as far as the leash allows- like an oscillator. When the
dog reaches the end of its leash, it is likely to turn and run the other
 PAGE : 79

way. You can follow the trail of a man to find the trend of the pair
When the dog deviates from that trail by the length of its leash, it
usually turns around. Usually, but not always If a dog sees a cat or a
rabbit, it may become excited enough to pull its owner off his trail.
Traders need to use judgment when using oscillator signals.
An oscillator becomes overbought when it reaches a high level
associated with tops in the past. Overbought means too high, ready to
turn down. An oscillator becomes oversold when it reaches a low level
associated with bottoms in the past. Oversold means too low, ready to
turn up.
Overbought and oversold levels are marked by horizontal reference
lines on the charts. The proper way to draw those lines is to place them
so that an oscillator spends only about 5 percent of its time beyond
each line. Place overbought and oversold lines so that they cut across
only the highest peaks and the lowest valleys of an oscillator. Readjust
these lines depending on circumstances.
When an oscillator rises or falls beyond its reference line, it helps a
trader to pick a top or a bottom. Oscillators work spectacularly well in
trading ranges, but they give premature and dangerous trading signals
when a new trend erupts from a range or when the market is following
a strong bullish or bearish trend. When a strong trend begins oscillators
starts acting like a dog that pulls its owner off his path.
An oscillator can stay overbought for weeks at a time when a new,
strong uptrend begins, giving premature sell signals, It can stay
oversold for weeks in a steep downtrend, giving premature buy signals.
Knowing when to use oscillators and when to rely on trend-following
indicators is hallmark of a mature analyst .

8.1.3 :TYPES OF DIVERGENCES :-

 PAGE : 80

Oscillators, as well as other indictors, give their best trading signals

when they diverge from prices.
Bullish divergences occur when prices fall to a new low while an
oscillator refuses to decline to a new low. They show that bears are
losing power, prices are falling out of inertia, and bulls are ready to
seize control. Bullish divergences often mark the end of downtrends.
Bearish divergences occur in uptrends- they identify market tops. They
emerge when prices rally to a new high while an oscillator refuses to
rise to a new peak. A bearish divergence shows that bulls are running
out of steam, prices are rising out of inertia, and bears are ready to take
control.

There are three classes of bullish and bearish divergences. Class A

divergences identify important turning points- the best trading
opportunities. Class B divergences are less strong, and class C
divergences are least important. Valid divergences are clearly visible -
they seem to jump from the charts. If you need a ruler to tell whether
there is a divergence, assume there is none.

Class A bearish divergences occur when prices reach a new high but an
oscillator reaches a lower high than it did on a previous rally. Class A
bearish divergences usually lead to sharp breaks. Class A bullish
divergences occur when prices reach a new low but an oscillator traces
a higher bottom than during its previous decline. They often precede
sharp rallies.

Class B bearish divergences occur when prices make a double top but
an oscillator traces a lower second top. Class B divergences occur
 PAGE : 81

when prices make a double bottom but an oscillator traces a higher

second bottom.
Class C bearish divergences occur when prices rise to a new high but
an indicator stops at the same level it reached during the previous rally.
The bearish divergences are depicted as under.

PRICE

INDICATOR

CLASS A CLASS B C

Class A bullish divergence- prices fall to a new low while an indicator

stops at a more shallow low than before. This is the strongest by
signal.
Class B bullish divergence- prices trace a double bottom while an
indicator traces a higher second bottom. This is the second strongest
buy signal.
Class C bullish divergence- prices fall to a new low while an indicator
makes a double bottom. This is the weakest bullish divergence.
 PAGE : 82

Class A divergences almost always identify good trades. Class B and

C divergences more often lead to whipsaws. It is best to ignore them,
unless they are strongly confirmed by other indicators.
Triple Bullish or Bearish Divergences consist of three price bottoms
and three oscillator bottom or three price tops and three oscillator tops.
They are even stronger than regular divergences.

8.2 :RATE OF CHANGE (ROC) AND SMOOTHED RATE OF

CHANGE :-
8.2.1 : BASIC DEFINITION :-
Momentum & Rate of Change measures trend acceleration, its gain or
loss of speed. These indicators show when a trend speeds up, slows
down, or maintains its rate of progress. They usually reach a peak
before the trend reaches its high and reach a bottom before prices hit
their low.
As long as oscillators keep reaching new highs, it is safe to hold long
positions. As long as they keep reaching new lows, it is safe to hold
short positions. When an oscillator reaches a new high it shows that an
uptrend is gaining speed and is likely to continue. When an oscillator
traces a lower peak, it shows that an uptrend has stopped accelerating,
like a rocket that has run out of fuel. When it flies only because of
inertia, you have to get ready for a reversal. The same reasoning
applies to oscillator lows in downtrends.

8.2.2 : METHOD OF CALCULATING :-

Momentum subtracts a past price from today’s price; Rate of Change
divides today’s price by a past price.
 PAGE : 83

For example a 7 days Momentum of closing prices equals today’s

closing price minus the closing price 7 days ago, Momentum is
positive if today’s price is higher ; negative if today’s price is lower ;
and at Zero if today’s price equals the price of 7 days ago. The slope of
the line connecting momentum values for each day shows whether
momentum is rising or falling.
A 7 day Rate of Change (RoC) divides the latest price by the closing
price 7 days ago. If they are equal, RoC equals 1; If today’s price is
higher then RoC is greater than 1 ; and if today’s price is lower, than
RoC is less than 1 The slope of the line that connects values for each
day shows whether Rate of Change is rising or falling.
Selection of Time Span : -The time span be selected based on the time
frame within which one wants to trade . In order to follow long term
trend 18 to 24 week may be selected . For an intermediate trend 5 to
12 week may considered and for short term trading , 10-20-24 or 30
days span may be selected.

8.2.3 :INTERPRETATION & TRADING RULES :-

1. When the indicator is above the reference line , the market price
that is being measured is higher than its level x days ago. If the
indicator is also rising than the rate of increase in price is higher. If the
indicator is above the center line , but is declining , the price is still
above its x days ago but the rate of increase is declining. The same
rules are applied in a downtrend.

2. Overbought & Over Sold Levels :-

 PAGE : 84

P Price ROC (-6.500) 45

40
Overbought zone 35
30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
O Oversold Zone -35
-40
01Reliance (F&O) 220
215
210
205
200
195
190
185
180
175
170
165
160
155
150
145
1 8 15 22 29 6 13 20 27 10 17 24 1 8 15 22 29 5 12 19 27 9
September October November December 1998 February

Perhaps the most widely used method of momentum indicators

interpretation is the evaluation of overbought and oversold levels .
Overbought and oversold lines are drawn on the chart . Sell if the price
goes above the Overbought line and Buy if the price goes below the
oversold line. There is no hard and fast rules about where the
overbought and oversold lines should be drawn . This can be
determined by studying the history and characteristics of the market
and stocks being monitored. The maturity of the trend have an effect
on the limits that an oscillator might reach . For example , when a bull
market has just begun , there is far greater tendency for an oscillator
to move quickly into overbought territory and to remain at very high
readings for a considerable period of time. In such cases the
overbought readings tend to give warnings of declines. Good buy and
sell signals are generated when the indicator goes above the
overbought line and the comes down on its way to zero and crosses
the overbought line from top .
 PAGE : 85

3. Divergences :-
As explained earlier , Profitable trades can be made by selling on
Bearish Divergences or buying on bullish divergences . When the
price reaches a higher top but the indicator makes a lower top,
described as Class A divergence , there is warning given that the trend
may reverse .It is extremely important to note that a negative
divergence only warns of weakening market condition and does not
represent market condition and does not represent an actual signal to
sell. Multiple divergences may occur before the prices change trend. It
is known that the more the number of divergencies more powerful
would the ensuing move.
Price ROC (-6.500)
Negative divergence on ROC - Bearish30
25
20
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
01Reliance (F&O) 205
200
195
190
185
180
175
170
165
160
155
150
145
27 2 9 16 23 2 9 16 23 30 6 13 20 27 4 12 18 25
February March April May

4. Trendlines can be plotted on Momentum Indicators .Usually the

breach of a trendline occurs in advance than on price. A break in a
trendline of Momentum or RoC often precedes a break of a price
trendline by a day or two when you see a leading indicator break a
 PAGE : 86

trendline, prepare for a break in the price trend. Any breach of a

trendline should be considered as an advance warning of a change in
trend.

5. Price patterns like Head & shoulder etc. can be seen on the
Momentum indicators. Usually it gees earlier breakout.

6. Buy when the price moves above the equilibrium line or sell when it
moves below it. This method requires experimentation and should be
combined with some other techniques. At times the indicator may just
dip below the line, may be on account of overreaction and immediately
it rises, in fact this can be one of the best buy signals .

7. Moving averages can also be applied on Momentum indicator and

reliable buy and sell signals can be generated on moving average
crossovers.

8. Momentum indicators signals should always be used in conjunction

with a trend-reversal signal by the actual price.
8.2.4 :SMOOTHED RATE OF CHANGE :-

This oscillator, was developed by Fred G.Schutzman. Smoothed Rate

of Change (S-RoC) compares the values of an Exponential Moving
Average (EMA) instead of actual prices. It gives fewer trading signals,
and the quality of these signals is better.

To create S-RoC you must first calculate an exponential moving

average of closing prices . The next step is to apply Rate of Change to
 PAGE : 87

the EMA. You can calculate a 13 day EMA of closing prices and then
apply a 21 days Rate of Change to it.

Some traders calculate the Rate of Change of prices first and then
smooth it with a moving average. Their method produces a much
jumpier indicator.

Interpretation & Trading Rules :

Changes in the direction of S-RoC often identify important market

turns Upturns of S-RoC mark significant bottoms, and its downturns
mark important tops Divergences between S-RoC and prices give
especially strong buy and sell signals.

1. Buy when S-RoC turns up from below its centerline , i.e. it enters
the positive area.
2. Sell when S-RoC stops rising and turns down, Sell short when S-
RoC turns down from above its centerline.
3. If prices reach a new high but S-RoC traces a lower peak, it shows
that the market crowd is less enthusiastic even though prices are higher
. A bearish divergence between S-RoC and price gives a strong signal
to sell short.

8.3 :RELATIVE STRENGTH INDEX :-

8.3.1 : BASIC DEFINITION & METHOD OF CALCULATING :-

Relative Strength Index (RSI) is an oscillator developed by J Welles

Wilder, Jr.
 PAGE : 88

100
RSI= 100-
1 + RS

average of net UP closing changes for a selected number of days

RS =
average net DOWN closing changes for the same number of
days

1. Obtain closing prices for the past 7 days

2. Find all days where the market closed higher than the day before and
add up the amounts of increases. Divide the sum by 7 to obtain the
average UP closing change

3. Find all days when the market closed lower than the day before and
add up the amounts of decline Divide the sum by 6 to obtain the
average DOWN closing change.

4. Divide the average up Closing change by the average DOWN

closing change to obtain Relative Strength (RS). Insert RS in the
formula above to arrive at RSI Relative Strength Index.

5. Repeat the process daily

RSI fluctuates between 0 and 100 When RSI reaches a peak and turns
down, it identifies a top When RSI falls and then turn up it identifies a
bottom. These turns come at different levels in different markets or
even in the same market during bull and bear periods.
Overbought and oversold levels vary from market to market and from
year to year There are no magical levels marking all tops and bottoms
 PAGE : 89

Oversold and overbought signals are like hot and cold reading on a
thermometer. The same temperature has a different meaning in
summer or in winter.

Horizontal reference lines must cut across the highest peaks and the
lowest valleys or RSI They are often drawn at 30 and 70 Some traders
use 40 and 80 levels in bull markets or 20 and 60 in bear markets .The
time span selected for RSI may be 5 days, 9,14 ..... depending upon the
time frame in which a trader is trading i.e Short term or medium term
or long term.

8.3.2 : TRADING RULES :-

1. Bullish and Bearish Divergences :-
85
Negative Divergence- Bearish 80
75
70
65
60
55
50
45
40
35
30
25
20
Positive Divergence - Bullish 15
4200
4100
4000
3900
3800
3700
3600
3500
3400
3300
3200
3100
3000
2900
2800
2700
2600
MarAprMayJun Jul AugSepOctNov Dec1996 MarApr MayJun Jul AugSepOct NovDec1997 Mar
 PAGE : 90

Divergences between RSI and price gives the strongest buy and sell
signals . They tend to occur at major tops and bottoms . They show
when the trend is weak and ready to reverse.
Bullish divergences give buy signals. They occur when the prices fall
to new low but RSI makes a more shallow bottom than during its
previous decline .Buy signals are especially strong if the first RSI
bottom is below its lower reference line and the second bottom is
above that line and vice versa for Bearish divergences.
2. Charting Pattern :-
Classic charting pattern methods work better with Relative Strength
Index than with other indicators . Trendlines , support and resistance
and head & shoulders patterns work well with RSI . RSI often
completes these patterns a few days in advance of prices , providing
hints of likely trend changes . For example RSI trendlines are usually
broken one or two days before the price trendlines .

Head & Shoulder pattern on RSI H 85

S S 80
75
70
65
60
55
50
45
40
35
30
25
20
15
4200
4100
4000
3900
3800
3700
3600
3500
3400
3300
3200
3100
3000
2900
2800
2700
2600
MarAprMayJun Jul AugSepOctNov Dec1996 MarApr MayJun Jul AugSepOct NovDec1997 Mar
 PAGE : 91

3. Overbought & Oversold Zones :- Buy when RSI declines below its
lower reference line and then rallies above it OR Sell when RSI rises
above when RSI rises above its upper reference line and then crosses
below it.

8.4 : STOCHASTIC :
8.4.1 : BASIC DEFINITION & METHOD OF CALCULATION :-
Stochastic is an oscillator popularized by George Lane. Stochastic
tracks the relationship of each closing price to the recent high low
range.
Stochastic consists of two line: a fast line called % K and slow line
called % D
1. The first step in calculating Stochastic is to obtain “Raw Stochastic”
or %K

C--- L
tod n
%K= 100
H--- - L
n n

Where C = today’s close

tod
L = the lowest point for the selected number of days
n
H = the highest point for the selected number of days
n
 PAGE : 92

n = The number of days for Stochastic, selected by the trader

The standard width of Stochastic’s time window is 5days although

some traders use much higher values. A narrow window helps catch
more turning points but a wider window helps identify major turning
points.

2. The Second steps is to obtain % D It is done by smoothing % K

usually over a three day a period .
3day sum of (C ---L )
tod n

%D= 100
3 day sum of (H ---L )
n n

Most trader use computers to construct Stochastic. Choosing the width

of the Stochastic window depends on a trend you are trying to identify
A very short term Stochastic (5 days or so ) helps catch short term
reversals. A longer Stochastic (14-21 days) helps identify more
significant market turns.
Stochastic is designed to fluctuate between 0 and 100 Reference lines
are drawn at 20 percent and 80 percent levels to mark overbought and
oversold areas.
 PAGE : 93

Stochastic Oscillator (45.89) 85

80
75
70
65
60
55
50
45
40
35
30
25
20
15
positive divg. 10
5
0
01MTNL (F&O) (130.00, 131.90, 128.80, 130.50) 230
220
210
200
190
180
170
160
150
June July August September October November December 1999 February

8.4.2 :TRADING RULES :-

Stochastic shows when bulls or bears become stronger or weaker.
Stochastic gives three types of trading signals, listed here in the order
or importance; divergences, the level of Stochastic lines, and their
direction
Divergences
The most powerful buy and sell signals or Stochastic are given by
divergences between this indicator and prices.
1. A bullish divergence occurs when prices fall to a new low but
Stochastic traces a higher bottom than during the pervious decline. As
soon as Stochastic turns up from its second bottom, It gives a strong
buy signal. .The best buy signals occur when the first bottom is below
the lower reference line and the second it above it.
2. A bearish divergence occurs when price rally to a new high but
Stochastic traces a lower top than during its previous rally.
Overbought and Oversold :-
 PAGE : 94

When Stochastic rallies above its upper reference line, it show that the
market is overbought. Overbought means too high, ready to turn down.
When Stochastic falls below its lower reference line, it shows that the
market is oversold
These signals work fine during trading ranges but not when a market
develops a dynamic trend . In uptrends Stochastic quickly becomes
overbought and keeps giving sell signals while the market rallies. In
downtrends, It pays to combine Stochastic with a long term trend
following indicator .
Line Direction :
When both Stochastic lines are headed in the same direction, they
confirm the short term trend When prices rise and both Stochastic lines
rise, the uptrend is likely to continue. When prices slide and both
Stochastic lines fall, the short term downtrend is likely to continue.
8.4.3 :MORE ON STOCHASTIC :-
Stochastic can be used in any timeframe, including weekly, daily , or
intraday..
Choosing the width of the Stochastic window is important. Short-term
oscillators are more sensitive.Long term oscillators turn only at
important tops and bottoms. If you use Stochastic as part of a trading
system, combined with trend following indicators, then a shorter
Stochastic is preferable.
An ingenious way to use Stochastic popularized by Jacob Bernstein is
called a Stochastic pop When Stochastic crosses above its upper
reference line, it indicates strength You can buy for a quick rally and
sell as soon as Stochastic turns down This signal can help you catch the
last splash of the bullish wave.
Stochastic is one of the favorite tools of automatic trading systems
developers
PAGE : 95
 PAGE : 96

CHAPTER 9: WEEKLY, MONTHLY , YEARLY & HOURLY

CHART
9.1 WEEKLY CHART : The Weekly chart are plotted by taking the
closing prices at the end of any week for any scrip. The weekly high
low bar is plotted by taking the opening price of the first day of trading of
any week , the high is the highest price at any time during the week and
low is the lowest price of the week. On BSE , the settlement period is a
calendar week . The Weekly Line chart is plotted by taking the closing
price as on Friday , the Open High Low Bar chart is plotted by taking
the opening price as on Monday , the High is the highest and the low is
the lowest during the week ending Friday .
9.2 MONTHLY CHART : The Monthly Line Chart is plotted by taking
the closing prices of the last trading day of the month . The Open , High
& Low Bar Chart is plotted by taking the, Opening price of the first
trading day of the month ,The High is the Highest and the Low is the
lowest price of any scrip during a given month
9.3 YEARLY CHART : The Yearly Line Chart is plotted by taking the
closing prices of the last trading day of the Year . The Open , High &
Low Bar Chart is plotted by taking the, Opening price of the first trading
day of the Year ,The High is the Highest and the Low is the lowest price
of any scrip during a given Year
9.4 TICK BY TICK OR HOURLY CHART : They are chart plotted on
the basis of open high low & close prices every hour . The tick by tick
chart are plotted by taking every tick prices recorded. The tick by tick
chart are given by Reuters - on line . The hourly chart can be plotted
manually. These chart are used for extreme short term trading , wherein
the position may be squared off within a day or an hour or less than an
hour etc. - Trading based on hourly chart may be risky since the market
 PAGE : 97

in the extreme short term is bombed with manipulation/rumours/over

reaction etc..
9.5: INTERPRETATION OF WEEKLY, MONTHLY , YEARLY &
HOURLY CHART,:
The rules of interpreting Weekly, Monthly , Yearly & Hourly chart are
the same as interpreting the daily chart. However the time frame differs ,
that is to say, on daily chart one may trade for week(s), while on the basis
of Weekly chart one may trade for month(s) and so on. I would like to
caution that it is very risky to trade on daily basis by referring to hourly
chart , since during intra day the market is more governed by rumours,
manipulation and such other reasons such that wild & irregular
fluctuations are seen on the chart.
 PAGE : 98

CHAPTER 10 : SUPPORT & RESISTANCE

The support price means the floor price at which the falling prices take
support and bounces back from that level , and resumes its upward
journey . The support price can be compared with the floor . Prices after a
rally retraces and it takes support at some level from where it touches ,
takes turn and resumes its upward journey . Similarly Resistance is the
roof where the prices hit and retraces and fall backs perhaps to take
support at lower levels. There are various support/resistance levels which
are described hereunder ;-
1. The previous important tops/bottoms acts as important
support/resistance or resistance/support levels , which means ,
prices ( in their downtrend journey) may be expected to rise after the
prices touches previous top. Similarly the previous important
bottoms acts as effective resistance at the time prices are rising and
after hitting the previous bottoms prices may be expected to fall .
00BSE Sensex 30 C
6500 6500
PREVIOUS TOPS AND BOTTOMS ACT AS
6000 SUPPORT OR RESISITANCE 6000

5500 5500

5000 5000
X X
4500 4500

4000 Z Z 4000

3500 3500

3000 3000

2500 Y Y Y 2500

2000 2000

1500 1500

1000 1000

500 500

0 0
19871988 1990 1992 19941995199619971998199920002001200220032004
 PAGE : 99

2. The falling prices may take support at rising moving average , may
be 30 days moving average or 200 days moving average and so on .
Similarly the rising prices may face resistance at falling moving
averages.
4400 00BSE Sensex 30 C 4400
4350 BSE30 - 10 EXP. MOVING AVERAGE ACTING AS SUPPO RT / RESISTANCE 4350
4300 4300
4250 4250
4200 4200
4150 4150
4100 4100
4050 4050
4000 4000
3950 3950
3900 3900
3850 3850
3800 3800
3750 3750
3700 3700
3650 3650
3600 3600
3550 3550
3500 3500
3450 3450
3400 3400
3350 3350
3300 3300
3250 3250
3200 3200
3150 3150
3100 3100
3050 3050
3000 3000
2950 2950
2900 2900
2850 2850
Decemb er 1998 Feb ruary March April May June July Aug ust

3. The trendlines act as important support & resistance levels.

01L&T (F &O) (729.0, 764.0, 727.0, 757.7)
450
L & T - TRENDLINES AS SUPPORT / RESISTANCE LEVELS.

400

350

300

250

200

150

100

50
1988 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
 PAGE : 100

4. The support & resistance points are discussed in various other chapters
like W.D.GANN theory in Miscellaneous Indicators , Fibonacci Studies
etc.
 PAGE : 101

CHAPTER 11 : MISCELLANEOUS INDICATORS/TRADING

METHODS AND SYSTEMS :
11.1: SPEED RESISTANCE LINES:-
Speed Resistance lines also called as 1/3 rd or 2/3 rd are a series of
trendlines that divide a price move into three equal sections . They are
used to define price support levels . For example if a price security is in a
rising trend , its price will usually stay above the 2/3 Speed line. If prices
do penetrate the 2/3 line , they may fall all the way to the 1/3 line before
regaining support. For the purpose of drawing a speed resistance line ,
first draw a line connecting the trough & peak , and the speed resistance
line is automatically drawn by almost all software on giving the necessary
command .
00BSE Sensex 30 C
6500 6500
SPEED RESISTANCE LINES TO DETERMINE
SUPPORT / RESISTANCE LEVELS.
6000 6000

5500 5500

5000 5000

4500 X 4500
X

4000 4000

3500 3500

3000 3000

S O N D 2002 M A M J J A S O N D 2003M A M J J A S O N D 2004M A M J J A

11.2 :BOLLINGER BANDS (STANDARD DEVIATION CHANNELS):-

 PAGE : 102

This is one method of Channel Trading System. The unique feature of

Bollinger Bands is that their width changes in response to market
volatility . The Bollinger Band creates an envelop within which the prices
move .The upper channel line shows where the market is overvalued .
The lower channel line shows where it is undervalued . It pays to buy in
the lower half of the rising channel and to sell short in the upper half of
the falling channel. A narrow BB identifies a sleepy quiet market. Major
market moves tend to erupt from flat bases. BB helps to find transition
from quiet to active markets. When prices rally outside a very narrow BB
, they give a buy signal . when they drop out of a narrow BB they give a
signal to short.
00BSE Sensex 30 C
4700 4700
4600 BOLLINGER BANDS 4600
4500 4500
4400 4400
4300 4300
4200 4200
4100 4100
4000 4000
3900 3900
3800 3800
3700 3700
3600 3600
3500 3500
3400 3400
3300 3300
3200 3200
3100 3100
3000 3000
2900 2900
2800 2800
2700 2700
1997 February April May June July August
September November 1998 February

11.3 ENVELOPE :
 PAGE : 103

ENVELOPES are Trading bands. The moving averages are shifted up

and down to create envelopes and to shift them right/left to center or
project the moving average . This method is similar to Bollinger Band
,discussed in the preceding para. The prices tend to bounce back off the
envelope rather than penetrate . If the price penetrates the upper boundary
of an envelope , it suggests that the uptrend is powerful and fast moving
and vice versa.

4700 00BSE Sensex 30 C 4700

4650 4650
4600 4600
4550 4550
4500 4500
4450 4450
4400 4400
4350 4350
4300 4300
4250 4250
4200 4200
4150 4150
4100 4100
4050 4050
4000 4000
3950 3950
3900 3900
3850 3850
3800 3800
3750 3750
3700 3700
3650 3650
3600 3600
3550 3550
3500 3500
3450 3450
3400 3400
3350 3350
3300 3300
3250 3250
3200 3200
3150 3150
3100 3100
3050 3050
1997 February April May June July August
September November 1998 February

11.4 : ADVANCE DECLINE RATIO :-

It measure the breadth of the market on a particular day. It measures the
number of scrips traded on the exchange closing higher to the number of
scrips closing lower on a particular day.
 PAGE : 104

CHAPTER 12 : FIBONACCI STUDIES :-

Leonardo Fibonacci was a wellknown mathematician who was born in Italy
around the year 1170. It is rumored that Mr. Fibonacci discovered the
relationship of what are now referred to as Fibonacci numbers while studying
the Great Pyramid of Gizeh in Egypt.
Fibonacci numbers are a sequence of numbers in which each successive
numbers is the sum of the two previous numbers :
1,2,3,,5,8,13,21,34,55,89,144,233.............
These numbers possess an intriguing number of interrelationships , such as the
fact that any given number is approximately 1.618 times the preceding number
and any given number is approximately 0.618 the following number . Fibonacci
Studies involves : Fibonacci Arcs, Fans, Retracements and Time Zones . All
the Fibonacci studies points the future support/resistance levels.
12.1 FIBONACCI ARCS :-
First a trendline is drawn between two extreme points ( i.e. a significant
trough and peak ) . Three Fibonacci Arc are then drawn (which are
automatically drawn by any software) centered on the second extreme
point , that intersect the trendline drawn between the two extreme points
at the Fibonacci levels of 38.2 % , 50.0 % and 61.8 %. The interpretation
of Fibonacci Arcs involves looking for or anticipating support and
resistance levels as prices approach the arcs . A common technique is to
display both Fibonacci Arcs and Fan lines and to anticipate
support/resistance at the points where the Fibonacci studies cross.
Fibonacci Arcs are displayed as under.
 PAGE : 105

6500 00BSE Sensex 30 C 6500

FIBONACCI ARC 6400
6300
6200
6100
6000 6000
5900
5800
5700
5600
5500 5500
5400
5300
5200
5100
5000 5000
4900
4800
4700
4600
4500 4500
4400
4300
4200
4100
4000 4000
3900
3800
3700
3600
3500 3500
3400
3300
3200
3100
3000 3000
2900
2800
2700
Oct NovDec2003 MarApr MayJun Jul AugSep Oct NovDec2004 Mar Apr MayJun Jul Aug

12.2 FIBONACCI FANS :-

First a trendline is drawn between two extreme points ( i.e. a significant
trough and peak ). The software then draws an invisible vertical line
through the second extreme point The vertical line is then divided at the
Fibonacci levels at 38.2 % , 50 % and 61.8 % . Finally three trendlines
are drawn from the first extreme point so they pass through the invisible
vertical line at the above three levels . The Fan lines acts as
support/resistance . This technique is similar to speed lines.
12.3. FIBONACCI RETRACEMENTS :-
Fibonacii Retracement levels are displayed by first drawing a trendline
between two extreme points. ( i.e. a significant trough and peak ) . The
Fibonacii levels are drawn at the Fibonacci levels of 0.0% , 23.6 % , 38.2
% , 50.0 % , 61.8 % ,100% , 161.8 % , 261.8 % and 423.6 % . After a
significant move either up or down , prices will often rebound and retrace
a significant portion of the original move . As the prices retraces ,support
 PAGE : 106

and resistance levels will often occur at or near the Fibonacci

Retracement levels.
6500 00BSE Sensex 30 C 6500
FIBONACCI RETRACEMENTS LEVELS 6400
6300
6200
6100
6000 6000
5900
5800
5700
5600
5500 5500
5400
5300
5200
5100
5000 5000
4900
4800
4700
4600
4500 4500
4400
4300
4200
4100
4000 4000
3900
3800
3700
3600
3500 3500
3400
3300
3200
3100
3000 3000
2900
2800
2700
2003Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2004Feb Mar Apr May Jun Jul Aug

12.4 : FIBONACCI TIME ZONES :-

The Fibonacci Time Zones displays vertical lines at the Fibonacii
intervals of 1,2,3,5,8,..... etc . The interpretation involves looking for
significant changes in price near the vertical lines .
00BSE Sensex 30 C 6500
X= STARTING PT.
6000 X 6000

5500 5500

5000 5000

4500 4500

4000 4000

3500 3500

3000 3000

2500 2500

2000 2000
1999 2000 2001 2002 2003 2004
 PAGE : 107

12.5 : FIBONACCI DAYS & WEEKS :-

Market quiet frequently takes turn at the end of 1,2,3,5,8,13,21,34,55....
days or weeks . At the end of Fibonacci days or weeks , one may look our
for a change in direction of the trend .
00BSEWEEKLY
BSE30 Sensex 30 BAR
C CHART - FIBO NACCI WEEK 4700
COUNT
4700
4600 4600
1
4500 4500
4400 13 4400
4300 4300
4200 1 4200
4100 4100
4000 4000
3900 3900
3800 3 1 3800
3700 3700
3600 3600
3500 3500
3400 3400
3300 5 3300
3200 8 3 3200
3100 1 3100
3000 3000
2900 2900
2800 1 2800
2700 2700
2600 2600
A S O N D 1997M A M J J A S O N D 1998 M A M J J A S O N D 1999 M A M J J A S

6500 00BSE Sensex 30 C 6500

BSE 30 MONTHLY CHART 8
MARKET TOPPED AT THE END OF 8 TH WEEK
6000 6000

5500 5500

5000 5000

4500 4500

4000 4000

3500 3500

3000 3000
1
2500 2500

2000 2001 2002 2003 2004 2005 2006

 PAGE : 108

CHAPTER 13 : W.D. GANN THEORY :-

W.D. GANN made millions by trading on stock exchange and at the end of his
career he wrote his book giving various techniques & methods used by him for
successful trading on stock exchange. In this chapter I have given some of the
most important ideas of W.D.Gann.
13.1 : Twenty Four Never Failing Rules :-
In order to make a success trading in the stock market , the trader must
have definite rules and follow them. The rules given thereunder are based
on personal experience of Gann as written by him in his book :-
“1. Amount of capital to use. Divide your capital into 10 equal parts
and never risk more than one-tenth of your capital on any one trade.
2. Use stop loss orders. Always protect a trade when you make it with
a stop loss order.
3. Never overtrade This would be violating your capital rule.
4. Never let a profit run into loss . After you once have profit , raise
your stop loss , so that you will have no loss of capital.
5. Do not buck the trend. Never buy or sell if you are not sure of the
trend according to the chart.
6. When in doubt get out , and do not get in when in doubt.
7. Trade only in active stocks . Keep out of slow , dead ones.
8. Equal distribution of risk . Trade in 4 or 5 stocks , if possible . Avoid
tying up all your capital in any one stock.
9. Never limit your orders or fix a buying or selling price . Trade at the
market.
10. Do not close your trades without good reason. Follow up with a
stop loss order to protect your profits.
 PAGE : 109

11. Accumulate a surplus . After you have made a series of successful

trades, put some money in surplus account to be used only in
emergency or in times of panic.
12. Never buy just to get dividend.
13. Never average a loss . This is one of the worst mistakes a trader
can make.
14. Never get out of the market just because you have lost patience or
get into the market because you are anxious from waiting.
15. Avoid taking small profits and big losses.
16. Never cancel a stop loss order after you have placed it at the time
you make a trade.
17. Avoid getting in and out of the market too often
18. Be just as willing to sell short as you are to buy. Let your object be
to keep the trend and make money.
19. Never buy just because the price of a stock is low or sell short just
because the price is high.
20. Be careful about pyramiding at the wrong time . Wait until the
stock is very active and has crossed resistance levels before buying
more and until it has broken out of the zone of distribution before
selling more.
21.Select the stocks with small volume of shares outstanding to
pyramid on the buying side and the ones with the largest volume of
stock outstanding to sell short.
22. Never Hedge . If you are long on one stock and it starts to go down
, do not sell another stock short to hedge it. Get out at the market take
your loss and wait for another opportunity.
23. Never change your position in the market without a good reason .
When you make a trade , let it be for some good reason or according
 PAGE : 110

to some definite plan , then do not get out without a definite indication
of a change in trend.
24. Avoid increasing your trading after a long period of success or a
period of profitable trades.

When you decide to make a trade be sure that you are not violating any
of these 24 rules which are vital important to your success . When you
close a trade with a loss , go over these rules and see which rule you
have violated , then do not make the same mistake the second time.
Experience and investigation will convince you of the value of these
rules , and observation and study will lead you to protect and practical
theory for success. “
One or two rules may not be relevant/applicable to Indian market.
13.2 :YOU SAID IT MR GANN:-
1. Nothing can stop the trend .
2.Do not guess; make a trade on definite rules .
3.Human nature does not change and that is the reason history repeats and
stocks act very much the same under certain conditions year after year
and in the various cycles of time.
4. Time change is more important than reversal in price.
5. Hope can lead to nothing but losses. A wise man changes his mind , a
fool never.
6. Action not delay makes money on stock market .
7. Do not buy or sell on hope or fear.
8. Learn the 3 most important factors - Time , Price and Volume.
9. Do not overtrade.
10. Successful investor have definite plans and rules and follow them .
 PAGE : 111

11. It is well for any trader to remember that when he makes a trade , he
can go wrong. Then how can he correct his mistake ? . By putting a stop
loss.
12. The prices on stock markets are governed by Supply and demand. No
matter whether the buying or selling is by public , by pools or by
manipulators , prices decline when there are scarce and when there are
more buyers than sellers.
13. When news are worst , it is the time to buy stocks as a Bull market
begins in gloom and ends in glory with nothing but good news.
14. Remember stocks are never too high to buy as long as the trend is up
and they are never too low to sell as long as the trend is down.
15. Always go with the trend and not against it.
16. Buy stocks in strong position and sell stocks in weak position .
13.3. RULES/ PRINCIPLES/TECHNIQUES OF W.D. GANN:-
RULE NO.1 : DETERMINE THE TREND :-
Determine the trend of the Average (Index) or the average of any
group of stocks that you intend to trade in , then select the stock in
which you want to trade and see if the Trend indications conform to
the Overall. Trend
RULE NO. 2 : BUY AT SINGLE , DOUBLE AND TRIPLE
BOTTOMS :-
Buy at Double and Triple Bottoms or on Single Bottoms when they
are nearer to previous Old Bottoms . Remember the rule : Tops or
cielings which are selling points become floors , supports or buying
points after these tops have been crossed and the market reacts to them
or sells slightly below them.
Sell at or against Single, Double or Triple Tops and remember that
after an Old Top is broken by several points and the market rallies up
 PAGE : 112

to or near it again , it becomes selling point . After you have made a

trade , determine the proper and safe place to place a Stop Loss Order.
Do not overlook the fact that the 4 rth time the averages or an
individual stock reaches the same level , it is not as safe to sell because
it nearly always goes through. Reverse this rule at the bottom.
Larsen & Toub ro (795 .0, 806.6, 775 .2, 782.7) 290
GANN RULE NO .2 BUY ON SINGLE, DOUBLE OR TRIPLE BOTTOM 285
280
BUY AT 2B OR 3B , SELL AT 2T 275
270
265
260
255
250
1T 2T 245
240
235
230
225
220
215
210
205
1T 2T 200
195
190
185
180
175
170
165
160
155
150
145
1B 2B 3B 140
135
130
April May June July Aug ust Sep tember
October
November
Decemb 1999
er Feb ruary
March

BSE Se nse x 30 C (4,8 14, 5,083, 4,7 23, 5,054)

T1 T2 T3
4500

4000

3500

3000

2500

2000

1500
GANN RULE NO.2 SELL ON 2ND/3RD TOP
BSE30 SENSEX MONTHLY BAR CHART
1000

500
1990 1991 1992 1993 1994 1995 1996 1997 1998

RULE NO 3 : BUY OR SELL ON PERCENTAGES :-

 PAGE : 113

Buy or Sell on 50 % decline from any high level or a 50 % advance

from any low level so long as these reactions or rallies are with the
main trend . You can use 3 to 5 %, next 10 to 12 % , next 20 to 25 % ,
next 33 to 37 % , next 45 to 50 % , 62 to 67 % , 72 to 78 % , and 85 to
87% . The most important are 50 ,33% , 66% and 100 % .
RULE NO. 4 : BUY AND SELL ON 3 WEEK’S ADVANCE OR
DECLINE :-
Buy on a 3 Week’s reaction or decline in Bull market when the main
trend is up, as this is the average reaction in strong bull market.In a
Bear market sell on rally of around 3 weeks after you know the trend is
down.
After a market advances or declines 30 days or more , the next time
period to watch for tops and bottoms is around 6 to 7 weeks which will
be a buying or selling level protected of course with stop loss
orders.After the market rallies or declines more than 45 to 49 days the
next time period is around 60 to 65 days which is about the greatest
average time that a Bear market rallies or Bull market reacts . (Here
buying or selling is recommended during the correction period and
with the main trend ).
RULE NO 5 : MARKET MOVES IN SECTIONS :-
Stock market campaigns move in 3 to 4 sections or waves . Never
consider that the market has reached final top when it makes the first
section in a move up , because if it is a real Bull market it will run at
least 3 sections and possibly 4 before a final high is reached.
In a Bear market or declining market , never consider the market as
final bottom when it makes the first decline or section because it will
run 3 and possibly 4 sections before the Bear campaign is over.
RULE NO. 7 : VOLUME OF SALES :
 PAGE : 114

Study the total volume of sales in determining when the trend is

changing.
RULE NO 8 : TIME PERIODS :-
The time factor and time period are most important in determining a
change in trend because Time can over balance Price .
RULE NO.9 : BUY ON HIGHER TOPS AND BOTTOMS :-
Buy when the market is making higher Tops and higher Bottoms which
shows that the main trend is up. Sell when the market is making lower
Tops and Lower Bottoms which indicates market is down.
RULE NO 10 . CHANGE IN TREND IN BULL MARKET :-
A change in trend often occurs just before or just after holidays .
Always check to see if the market is exactly 1,2,3,4,5, years from any
extreme High or Low Price. Check back to see if the Time Period is
15,22,34,42,48 or 49 months from any extreme high or low price as
these are important time periods to watch for change of trend.
RULE NO. 11 SAFEST BUYING AND SELLING POINTS ;-
It is always safest to buy stocks after a definite change in trend has
been established . After a stock makes bottom and has a rally , then
follows the secondary reaction and it gets support at higher bottom .
When it starts to advance and crosses the top of the first rally, it is the
safest place to buy because the market has already given an indication
of uptrend . Stop loss can be placed under the Secondary bottom.
Safest Selling Point :- After a market has advanced for a long time
and made Final High and has the first sharp and quick decline , then
rallies and makes the second lower top and from this top declines and
break the Low point of the first decline , it is then safer to sell because
it has given the signal that the main trend has changed to the down
side.
13.4. :CASE STUDIES ON GANN RULES
 PAGE : 115

CASE STUDY NO. 1. ON TIME PERIOD

ESTIMATED DAYS IN RANGE WHERE SUPPORT/RESISTANCE IS EXPECTED

NO OF DAYS WITHIN WHICH EXAMPLE EXAMPLE EXPECTED RANGE WITHIN DATE OF

MARKET MAY CHANGE TREND WHICH TREND MAY CHG CHG OF
ON BSE 30 SENSEX TREND

28 TO 31 1/11/99 11-Jan-99 08-Feb-99 11-Feb-99 08-Feb-99

45 TO 49 10/21/97 21-Oct-97 05-Dec-97 09-Dec-97 11-Dec-97
60 TO 65 09/15/92 15-Sep-92 14-Nov-92 19-Nov-92 19-Nov-92
85 TO 92 01/28/98 28-Jan-98 23-Apr-98 30-Apr-98 22-Apr-98

CASE STUDY NO.2 . PECENTAGE RETRACEMENT

PRICE OF THE SCRIP AT THE TOP ............. 4630BSE 30

BUY ON FOLLOWING PERCENT POINTS RANGE RANGE

50 T 50 2315 2315
O
10 T 12 4167 4074
O
20 T 25 3704 3473
O
33 T 37 3102 2917
O
45 T 50 2547 2315
O
62 T 67 1759 1528
O
100 T 100 0 0
O

PRICE OF THE SCRIP AT BOTTOM ........................ 2070BSE 30

SELL ON FOLLOWING PERCENT RANGE RANGE

POINTS

50 T 50 3105 3105
O
10 T 12 2277 2318
O
20 T 25 2484 2588
O
33 T 37 2753 2836
O
45 T 50 3002 3105
O
62 T 67 3353 3457
O
 PAGE : 116

100 T 100 4140 4140

O

CASE STUDY NO.3

CHECK TO SEE THE MARKET IS 1,2,3,4,5,YRS
FROM ANY EXTREME HIGH OR LOW PRICE. AS THESE ARE
IMPORTANT TIME PERIODS TOWATCH FOR CHANGE IN TREND

LOWS

DATE INDEX 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR

28-Mar-88 390 28-Mar-89 28-Mar-90 28-Mar-91 28-Mar-92 28-Mar-93

25-Jan-91 956 25-Jan-92 25-Jan-93 25-Jan-94 25-Jan-95 25-Jan-96
26-Apr-93 2036 26-Apr-94 26-Apr-95 26-Apr-96 26-Apr-97 26-Apr-98
25-Jan-96 2826 25-Jan-97 25-Jan-98 25-Jan-99 25-Jan-00 25-Jan-01
04-Dec-96 2745 04-Dec-97 04-Dec-98 04-Dec-99 04-Dec-00 04-Dec-01

HIGHS

09-Oct-90 1560 09-Oct-91 09-Oct-92 09-Oct-93 09-Oct-94 09-Oct-95

22-Apr-92 4467 22-Apr-93 22-Apr-94 22-Apr-95 21-Apr-96 21-Apr-97
15-Sep-94 4617 15-Sep-95 14-Sep-96 14-Sep-97 14-Sep-98 14-Sep-99
17-Jun-96 4067 17-Jun-97 17-Jun-98 17-Jun-99 16-Jun-00 16-Jun-01

FOR LOWS

DATE INDEX 22 MTHS 34 MTHS 42 MTHS 48 MTHS 49 MTHS

28-Mar-88 390 28-Jan-90 28-Jan-91 28-Sep-91 28-Mar-92 28-Apr-92

25-Jan-91 956 25-Nov-92 25-Nov-93 25-Jul-94 25-Jan-96 25-Feb-97
26-Apr-93 2036 26-Feb-95 26-Feb-96 26-Oct-96 26-Apr-97 26-May-97
25-Jan-96 2826 25-Nov-97 25-Nov-98 25-Jul-99 25-Jan-01 25-Feb-01
04-Dec-96 2745 04-Oct-98 04-Oct-99 04-Jun-00 04-Dec-00 04-Jan-01

FOR HIGH

09-Oct-90 1560 09-Jul-92 09-Jul-93 09-Mar-94 09-Sep-94 09-Oct-94

22-Apr-92 4467 22-Feb-95 22-Feb-96 22-Oct-96 22-Apr-97 22-May-97
15-Sep-94 4617 15-Jul-94 15-Jul-95 15-Mar-96 15-Sep-98 15-Oct-98
 PAGE : 117

CASE STUDY NO. 4

DATES BSE 30 ANNIVERSARIES

PTS DATES

08-Dec-90 659 08-Dec

25-Jan-91 956 25-Jan
22-Apr-92 4467 22-Apr
26-Apr-93 2036 26-Apr
12-Sep-94 4630 12-Sep
25-Jan-96 2826 25-Jan
18-Jun-96 4069 18-Jun
04-Dec-96 2745 04-Dec
05-Aug-97 4548 05-Aug
28-Jan-98 3209 28-Jan

CASE NO. 5
CALENDER YEARS HIGH & LOW
27/02/87 578 27-Feb
10/12/87 405 10-Dec

28/03/88 390 28-Mar

18/11/88 719 18-Nov

06/01/89 625 06-Jan

12/12/89 798 12-Dec

08/02/90 659 08-Feb

09/10/90 1602 09-Oct

25/01/91 947 25-Jan

20/11/91 1955 20-Nov

08/01/92 1945 08-Jan

22/04/92 4467 22-Apr

27/04/93 1980 27-Apr

13/12/93 3459 13-Dec

CHAPTER 14 : JAPANESE CANDLESTICK:-

14.1 INTRODUCTION:-
 PAGE : 118

The Japanese method - Japanese candlestick charting and analysis is a viable

and effective tool for stock market analysis. Japanese candlestick provide
visual insight into current market psychology . They are powerful method of
analyzing and timing the stock market .They have been used for hundreds of
years only supports the fact . When Japanese candlesticks are combined with
other technical indicators , market timing and trading results can be enhanced
considerably.
14.2 BASIC DEFINITION :-
14.2.1 THE BODY : The box that makes up the difference between the
open and close is called as the real body of the candlestick . The height of
the body is the range between the day’s open price and the day’s close
price . When the body is black , it means that the closing prices was lower
than the opening price . When the closing price is higher than the opening
, the body is white.
14.2.2 : THE SHADOWS : The Japanese candlestick line may have
small thin lines above and or below the body. These lines are called
shadows and represent the high and low prices reached during the trading
day. The upper shadow represent the high price and the lower shadow
represents the low price.

14.2..3 : LONG DAYS : Long day describes the length of the

body . A long day represents a large price movement for the day.

14.2.4 : SHORT DAYS : They are the opposite of long days i.e.
the body is small , which means the difference between the
opening price and closing price is small.
 PAGE : 119

14.2.5 : BLACK MARUBOZU : A black Marubozu is a long

black day with no shadows on either end. This is considered to
be extremely weak line .
14.2.6 : WHITE MARUBOZU : A white Marubozu is a long
white day with no shadows on either end. This is considered to
be extremely strong/bullish line.
14.2.7 : CLOSING MARUBOZU : A closing Marubozu has no
shadow extending from the close end of the body. If the body is
white there is no upper shadow because the close is at the top of
the body .Like wise there is no lower shadow because the close is
at the bottom of the body. The white closing marubozu is
considered to be strong line while the black closing marubozu is
considered to be weak line.
14.2.8 : OPENING MARUBOZU : The opening Marubozu has
no shadow extending from the price end of the body . If the body
is white , there would be no lower shadow , making it a strong
bullish line . Again we have the White Opening and Black
Opening marubozu .The white candle is strong line and black
line is weak line but lesser in degree as compared to Closing
Marubozu.
14.2.9 : SPINNING TOPS: Spinning tops are candlesticks with
small real bodies with upper and lower shadows that are of
greater length than the body ‘s length . They represent indecision
between the bulls and the bears . The color is not important
14.2.10 : DOJI :A Doji occurs when open and close for that day
are the same , or certainly very close to being the same , they are
called Doji Lines. It signals indecision and uncertainty .
14.2.11 : LONG LEGGED DOJI : The long legged Doji has
 PAGE : 120

long upper shadows and lower shadows clearly reflecting

indecision of buyers and sellers
14.2.12 : GRAVESTONE DOJI :- This is another form of Doji
day . It develops when the Doji is very near or at the low of the
day. A gravestone Doji is bearish . It means failure to rally .

14.2.13 : DRAGONFLY DOJI : It occurs when the open and `

close are at the high of the day.
 PAGE : 121

14.3 : REVERSAL CANDLE PATTERN :-

14.3.1 : HAMMER & HANGING MAN
HANGING MAN

HAMMER
The Hammer and Hanging man are each made of single candlestick
lines . They have long lower shadows and small real bodies that are
very near the top of their trading range. The Hammer occurs at the
downtrend and is so named because it is hammering out bottom .
A hanging man occurs at the top of a trend or during as uptrend . The
name hanging man comes from the fact that the candle line looks like a
man hanging .
RULES OF RECOGNITION :-
1. The small real body is at the upper end of the trading range.
2. The color of the body is not important.
3. The long lower shadow should be much longer than the length of
the real body , usually two to three times.
4. There should be no upper shadow , or there is it should be very
small.
5. Confirmation is required.

HAMMER: There is an air of bearishness. The market opens and sells

of sharply . However the sell of is abated and the market returns to , or
near its high of the day. The failure of the market to continue the
 PAGE : 122

selling reduces the bearish sentiment and most traders would be

uneasy with any bearish position. If the close is above open , causing a
white body , the situation is even better. Confirmation would be higher
close the next day.
BSE Sensex 30 C (5,041.1, 5,082.8, 5,020.7, 5,054.3)
SHOOTING STAR 3800
3750
3700
3650
3600
3550
3500
3450
3400
3350
3300
3250
HAMMER 3200
3150

15 22 29 5 12 19 27 2 9 16 23 2
1998 February March

HANGING MAN: The market was bullish. The market should trade much
lower during the day then what it opened, then rally to close near the
high. Confirmation is by closing lower next day.
 PAGE : 123

State Bank of India (448.0, 466.0, 445.7, 463.3) 645

HANGING MAN 640
635
630
625
620
615
610
605
600
595
590
585
580
575
570
565
560
555
550
545
540
535
23 1 8 15 22 29
March

14.3.2 : ENGULFING PATTERN :-

The engulfing pattern is one of the most reliable Japanese candle stick
pattern. It is a major reversal pattern and indicates shift of trend.

BULLISH ENGULFING BEARISH ENGULFING

RULES OF RECOGNITION:
1. A definite trend must be underway.
 PAGE : 124

2. The second day’s body must completely engulf the prior day’s body
.This does not mean , however , that either the top or the bottom of the
two bodies cannot be equal , it just means that both tops and both
bottoms cannot be equal.
3. The first day color should reflect the trend : black for a downtrend
and white for an uptrend
4. The second real body of the engulfing pattern should be the opposite
color of the first body
5. The shadows are not considered in this pattern.
6. Confirmation is required.
BSE Sensex 30 C (5,041,
BEARISH 5,083, 5,021,
ENGULFING 5,054)
PATTERN 4300
4200
4100
4000
3900
3800
3700
3600
3500
3400
3300
3200
3100
3000
2900
2800
2700
23 2 9 16 23 30 6 13 20 27 12 18 25 1 8 15 22 29 6 13 20 27 3 10 17 24 31
March April May June July August September
 PAGE : 125

14.3.3: HARAMI :-

BULLISH HARAMI BEARISH HARAMI

RULES OF RECOGNITION :-
1. A long day is preceded by a reasonable trend.
2. The color of the long first day is not important , but it is the best if it
reflects the trend of the market.
3. A short day follows the long day , with its body completely inside
the body range of the long day . Just like the Engulfing day, the tops or
bottoms of the bodies can be equal , but both tops and both bottoms
cannot be equal.
4. The short day should be the opposite color of the long day .
5. Confirmation is required.
 PAGE : 126

BSE Sensex 30 C (5,041, 5,083, 5,021, 5,054) 6000

5900
5800
5700
5600
BEARISH HARAMI PATTERN 5500
5400
5300
5200
5100
5000
4900
4800
4700
4600
4500
4400
4300
4200
4100
4000
3900
3800
3700
28 6 13 21 27 3 10 17 24 2 8 15 22 29
March April May June

14.3.4 : HARAMI CROSS :-

BULLISH HARAMI CROSS BEARISH HARAMI CROSS

RULES OF RECOGNITION ;
1. A long day occurs within a trending market.
2. The second day is doji
3. The second day Doji is within the range of the previous long day .
1. This pattern is similar to the Harami pattern , the main difference is
on the second day which is a Doji here.
 PAGE : 127

Larsen & Toubro (795.00, 806.60, 775.15, 782.65)

210
205
200
195
190
185
180
175
170
165
160
155
150
145
BULLISH HARAMI CROSS
140
7 14 21 28 4 11 18
December 1999

4.3.5 : INVERTED HAMMER AND SHOOTING STAR :-

INVERTED HAMMER SHOOTING STAR

Inverted Hammer :- The inverted hammer is a bottom reversal line ,. I

occurs in a down trend and represents a possible change of trend
from bearish to bullish .
RULES OF RECOGNITION :
1. A small real body is formed near the lower part of the price range.
 PAGE : 128

2. No gap down is required.

3. The upper shadow is usually no more than two times as long as the
body .
4. The lower shadow is virtually non existent .
5. Confirmation is required
Shooting Star : It is a major reversal , significant & a reliable pattern.
It occurs at the top of an uptrend suggesting beginning of bearish trend
. A rally attempt was completely aborted when the close occurred near
the low of the day .
RULES OF RECOGNITION ;
1. Prices gap open after an uptrend
2. A small body is formed near the lower part of the price range.
3. The upper shadow is at Two to three times as long as the body.
4. The lower shadow is virtually non-existence.
2. Confirmation is required .

BSE Sensex 30 C (5,041.1, 5,082.8, 5,020.7, 5,054.3)

4150
SHOOTING STAR
4100
4050
4000
3950
3900
3850
3800
3750
3700
3650
3600
3550
3500
3450
3400
3350
30 6 13 20 27 3 10 17 24 1 8 15 22 29 5 12
May June July August
 PAGE : 129

14.3.6 : PIERCING LINE :-

.

This is a Bullish reversal pattern .This pattern occurs in a downtrend

RULES OF RECOGNITION :
1. The first day is long black body continuing the downtrend.
2. The second day is a white body which opens below the low of the
previous day ( that’s low and not close )
3. The second day closes within but above the midpoint of the
previous body .
3. Confirmation is required.
Reliance Industries (439.25, 458.00, 438.00, 454.80)
160

155

150

145

140

135

130

PIERCING LINE 125

120
17 24 3 10 17 25 31 7 15 21 28 5 12 19
March April May
 PAGE : 130

14.3.7 : DARK CLOUD COVER :-

Bearish Reversal Pattern . It is the counterpart of the Piercing Line .

RULES OF RECOGNITION :-
1. The first day is a long white body which is continuing the uptrend .
2. The second day is a black body day with the open above the
previous day’s high ( that’s the high not the close ) .
3. The second (black) day closes within and below the midpoint of the
previous white body.
4. Confirmation is required.
BSE Sensex 30 C (5,041.1, 5,082.8, 5,020.7, 5,054.3)
3350
DARK CLOUD COVER
3300
3250
3200
3150
3100
3050
3000
2950
2900
2850
2800
2750
2700

7 14 22 28 4 13 18 25 2 9
November December

14.3.8 : DOJI STAR :-

.
 PAGE : 131

A Doji Star is warning that the trend is about to change

RULES OF RECOGNITION:-
1. The first day is a long day.
2. The second day gaps in the direction of the previous trend .
3. The second day is a Doji .
4. The shadows on the Doji day should not be excessively long .

Reliance Industries (439.25, 458.00, 438.00, 454.80)

DOJI STAR
215

210

205

200

195

190

185

180
27 4 11 18 25 1 8 16 24 29 5 12 19 27 3
July August September October

14.3.9 : MORNING STAR AND EVENING STAR :-

 PAGE : 132

MORNING STAR EVENING STAR

MORNING STAR : The morning star is a bullish reversal pattern . A

downtrend has been in place . The next day prices gap lower on the
open and close near the open . This small body shows the beginning of
indecision . The next day prices gap higher on the open and then closes
much higher. The evening star is the bearish counterpart of Morning
Star and the scenario is just opposite of the Morning Star.
RULES OF RECOGNITION :-
1. The first day is always the color that was established by the ensuing
trend . That is, an uptrend will yield a long white day for the first day
of the evening star and a downtrend will yield a black first day of the
morning star.
2. The second day , the star is always gapped from the body of the first
day . Its color is not important .
3. The third day is always the opposite color of the first day.
4. The first day , and most likely the third day , are considered long
days.
5. Confirmation is not required .
6. The Rules of Evening star are just the opposite of the Morning Star.
14.3.10: THE MORNING AND EVENING DOJI STARS :-
 PAGE : 133

MORNING DOJI STAR EVENING DOJI STAR

This pattern is similar to the Morning and Evening Star , the only
difference in this pattern is the Doji star .

RULES OF RECOGNITION :-
1. Like many reversal patterns , the first day’s color should represent
the trend of the market .
2. The second day must be a Doji star ( a Doji that gaps )
3. The third day is the opposite color of the first day .
4. Confirmation is not required.

14.3.11 : ABANDONED BABY :-

This is one more major reversal pattern belonging to the family of
Morning and Evening star patterns. In an Abandoned Baby as
compared to Morning/Evening Doji star , the shadows of the Doji also
gaps , like the island reversal pattern .

ABANDONED BABY .
RULES OF RECOGNITION ;-
1. The first day should reflect the prior trend .
 PAGE : 134

2. The second day is a Doji , whose shadows gap above or below the
previous day’s upper or lower shadow.
3. The third day is the opposite color of the first day.
4. The third day gaps in the opposite direction with no shadows
overlapping .
 PAGE : 135

14.3.12 : MEETING LINES

1. The first body‘s color always reflects
the trend ; black for downtrend and
white for uptrends. 2. The second day
is the opposite color. 3. The close of
each day is the same 4. Both days
should be long days. 5. Confirmation is
suggested.

14.3.13 : UNIQUE THREE RIVER

BOTTOM:
1. Bullish reversal pattern. 2. The first
day is a long black day. 3. The second
day is a Harami day, but the body is
also black. 3. The second day has a
lower shadow that sets a new low. 4.
The third is short white day which is
below the middle day . 5. The third day
is a short white day which is below the
middle day. 6. Confirmation is not
required.
 PAGE : 136

14.3.14: THREE WHITE SOLDIERS :

1. Bullish reversal pattern.
Confirmation is not required. 3. Three
consecutive long white lines occur,
each with a higher close. 4. Each
should open within the previous body.
5. Each should close at or near the high
for the day.
14.3.15 : ADVANCE BLOCK :
1. Bearish reversal pattern .2.
Confirmation is suggested. 3. Three
white days occur with consecutively
higher closes. 4. Each day opens within
the previous days body 5. A definite
deterioration in the upward strength is
evidenced by long upper shadows on
the second and third days.

14.3.16: DELIBERATION :
1. Bearish reversal pattern .2.
Confirmation is suggested. 3 The first
and second day have long white bodies.
4. The third day opens near the second
day’s close . 5. The third day is a
Spinning Top and most probably a star.

14.3.17. THREE BLACK CROWS :

 PAGE : 137

1. Bearish Reversal Pattern 2. No

confirmation required. 3. Three
consecutive long black days. 4. Each
day closes at a new low 5. Each day
opens within the body of the previous
day. 6. Each day closes at or near its
lows.
14.3.18 : IDENTICAL THREE
CROWS :
1. . Bearish Reversal Pattern 2. No
confirmation is required. 3 Three long
black days are stair stepping
downwards . 4. Each day starts at the
previous day’s close.
 PAGE : 138

`14.3.19 : TWO CROWS :

1. . Bearish Reversal Pattern 2.
Confirmation is suggested .3 The trend
continues with a long white day. 4. The
second day is a gap up and a black day
.5. The third day is also a black day. 6.
The third day opens inside the body of
the second day and closed inside the
body of the first day.

14.3.20 : THREE INSIDE UP AND

THREE INSIDE DOWN :
1. No confirmation is required. 2. A
HARAMI pattern is first identified
using all the previously set rules. 3.
The third day shows a higher close for
a Three Inside up and a lower close for
a Three Inside Down.
14.3.21: THREE OUTSIDE UP AND
THREE OUTSIDE DOWN :
1. No confirmation is required 2.
Engulfing pattern is formed using all of
the previously set rules .2. The third
has a higher close for the Three
Outside Up and pattern and a lower
close for a three Outside Down Pattern
.
 PAGE : 139

14.3.22 : THREE STARS IN THE

SOUTH :
1. Bullish reversal pattern .2
Confirmation is suggested. 3. The first
day is a long black day with a long
lower shadow. 4. The second day has
the same basic shape as the first day ,
only smaller in size. 5. The low is
above the previous day’s low. 6. The
third day is a small black Marubozu
that opens and closes inside the
previous day’s range.
 PAGE : 140

14.3.23 : CONCEALING BABY SWALLOW :

1. Bullish reversal pattern. 2. No confirmation is
required. 3. Two black Marubozu days make up
the first two days 4. The third day is black with
a down gap open . However , this day trades
into the body of the previous day, producing a
long upper shadow. 5.The fourth black day
completely engulfs the third day , including the
shadow.
14.3.24 : STICK SANDWICH:
1. Bullish reversal pattern. 2. Confirmation is
suggested. 3. A black body in a downtrend is
followed by a white body that trades above the
close of the black body. 4. The third day is a
black day with a close equal to the first day.
14.3.25 : KICKING :
1. Bullish & Bearish patterns . 2. No
confirmation is required. 3. A Marubozu of one
color is followed by a Marubozu of the opposite
color. 2. A gap must occur between the two
lines.

14.3.26 : HOMING PIGEON:

1. Bullish reversal pattern. Confirmation is
required. 3. A long day occurs in a downtrend 4.
A short black body is completely inside the
previous day’s body ( including the shadows)
 PAGE : 141

14.3.27 : MATCHING LOW :

1. Bullish reversal pattern. 2. Confirmations
suggested .3. A long black day occurs.4. The
second day is also a black day with its close
equal to the close of the first day.
14.3.28: UPSIDE GAP TWO CROWS :-
1. Bearish reversal pattern.2. Confirmation is
not required. 3. An uptrend continues with a
long white day. 4. An upward gapping black day
is formed after the white day.4. A second black
day opens above the first black day and closes
below the body of the first black day . Its body
engulfs the first black day. 5. The close of the
second black day is still above the close of the
long white day.

14.4 :CONTINUATION PATTERNS :

14.4.1 : UPSIDE TASUKI GAP AND

DOWNSIDE TASUKI GAP :
1. Continuation pattern. 2. Confirmation is
recommended . 3. A trend is under way, with a
gap between two candlesticks of the same color
.
2. The color of the first two candlesticks
represents the prevailing trend.3. The third day ,
an opposite - color candlestick opens within the
body of the second day.4. The third day closes
 PAGE : 142

into the gap but does not fully close the gap.

14.4.2 : SIDE-BY SIDE WHITE LINES :

1. No confirmation is required.2. A gap is made
in the direction of the trend .3. The second day
is a white candle line .4.The third day is also a
white candle line of about the same size and
opens at about the same price .

14.4.3 : RISING THREE METHODS AND

FALLING THREE METHODS :-
1. No confirmation is required. 2 . A long candle
stick is formed representing the current trend .3.
This candlestick is followed by a group of small
real body candlesticks. It is best if they are
opposite in color .4. The small candlesticks rise
or fall opposite to the trend and remain within
the high low range of the first day .5. The final
day should be a strong day , with a close outside
of the first day’s close and in the direction of the
original trend.
 PAGE : 143

14.4.4 : SEPARATING LINES :-

1. Confirmation is required .2. The first day is
the opposite color of the current trend .3. The
second is the opposite color of the first day . 4.
The two bodies meet in the middle , at the open
price .

14.4.5 : THREE LINE STRIKE :

1. Confirmation is definitely required. 2. Three
days resembling Three White Soldiers are
continuing an uptrend. 3. A higher open on the
fourth day drops to close below the open of the
first white day.
BEARISH THREE LINE STRIKE:
1. Three days resembling Three Black Crows 2.
A lower open on the fourth day rallies to close
above the open of the first black day.

14.4.6 : UPSIDE GAP THREE METHODS

AND DOWNSIDE GAP THREE METHODS :
1. confirmation is suggested 2. A trend
continues , with two long days that have a gap
between them .3. The third day fills the gap and
is the opposite color of the first two days.

14.4.7 : ON NECK :
1. Bearish continuation pattern. Confirmation is
suggested 3. A long black line is formed in a
 PAGE : 144

downtrend .4. The second day is white and

opens below the low of the previous day. 5. This
day does not need to be a long day or it might
resemble the bullish Meeting Line . 6. The
second day closes at the low of the first day.
14.4.8 : THRUSTING :
1. Bearish continuation pattern 2. Confirmation
is required. 3. A black day is formed in a
downtrend 4. The second day is white and opens
considerably lower than the low of the first
day.5. The second day closes well into the body
of the first day , but not above the midpoint .

14.4.9 : IN NECK :
. Bearish continuation pattern. Confirmation is
suggested 3. A long black line is formed in a
downtrend .4. The second day is white and
opens below the low of the previous day. 5.The
close of the second day is just barely into the
body of the first day. For all practical purposes ,
the close are equal.
 PAGE : 145

CHAPTER NO 15 : SPECULATORS STRATEGY :-

In order to speculate on the stock market I give the following guidelines :
1. Determine the current phase of the market . One may refer any index
chart like the BSE30, BSE100, NIFTY , DOLLEX etc. With the help of
an index chart one may be able to judge the present market scenario as to
whether the Primary trend is bullish or bearish . Use the index which is
old , popular and covers the larger portion of the market capitalisation . In
my opinion BSE30 is the ideal index to study to form an opinion on the
market .
2. Determine the long term trend by studying the Index chart . Then
determine whether you are in the intermediate bull market of a primary
bull market or in the intermediate secondary bear market of the primary
bull market .
3. Select the scrips which are in confirmity with the index . The
selection of the scrips is of course based on the individual charts . So if
the market is bullish, take position in the scrips which looks bullish on
the chart .
4. Decide your stop loss .
5. Decide on the time frame within which you want to trade , whether
long term, medium term or very short term.
6. Decide on the total value of position you want to take on the market .
Do not overtrade since if you overtrade you may have to quit the market
prematurely though you may be perfectly correct in technical analysis.
7. Allow your profits to run but not losses.
8. Trade on both the sides of the market . Make trend your friend . do not
develop the idea that you are bull and hence you can trade only on the
long side. Change your colors according to the market .
9. Follow the market . DO not tell the market to do this or that . Accept
the market . Do not think that the market is foolish ,especially if you are
 PAGE : 146

against the market. If you take any position which may turn out to be
contrary to the market trend , surrender your self by using stop loss.
10. Do not average .
11. Do not allow yourself to be guided or scared by rumours or current
news. The current news , rumours or manipulation can create ripples in
the price movements but they cannot change the market trend.
12. Do not take position in only one scrip , divide your capital , and do
not risk your capital more than 15 % to 20 % in any one scrip . At the
same time do not trade in many scrips such that things go beyond your
control and ultimately profit in few scrips is taken away by losses in
other scrips.
13. Market gives you time . Market gives you ample opportunities .
Take your chances , do limited trading , take careful trading decision
after careful technical analysis and you are sure to make a fortune in the
market.
14. Trade only on clinching evidences
15. Select set of tools/techniques for trading on the market . Do not keep
on changing the tools otherwise you may not be able to take advantage of
law of averages

CONCLUDING REMARKS:
Knowledge of Technical Analysis can throw upon highly profitable
opportunities in Trading or Investing in Stocks, Commodities, Forex and
Interest Rate Derivatives markets, either on proprietary account or as a
consultant or as a portfolio manager. It has global application since the
rules of technical analysis are the same all over the world, whether it is
BSE30 or Dow Jones or Gold or Currency. Technical Analysis is a
complete theory in itself which may help one to take Investment
decisions on a longer time frame and not only for the purpose of trading
 PAGE : 147

or speculating as is commonly misconstrued. In today’s dynamic and

complex global markets wherein the all the markets anywhere in the
world are interlinked, whether it be Stock Markets or Commodities or
Forex Markets, knowledge of technical analysis would be one of the best
technique to take profitable financial decisions.