Fundamental & Technical Analysis

1. Fundamental & Technical Analysis

2. Is the company's stock a good investment? • Fundamental analysis serves to answer questions, such as:  • Is the company's revenue growing? • Is it actually making a profit? • Is it in a strong-enough position to beat out its competitors in the future? • Is it able to repay its debts? • Is management trying to "cook the books"?

3. Fundamental analysis • Fundamentals also include everything from a company's market share to the quality of its management. • Quantitative – capable of being measured or expressed in numerical terms. • Qualitative – related to or based on the quality or character of something, often as opposed to its size or quantity.

4. Fundamental analysis • one of the primary assumptions of fundamental analysis is that the price on the stock market does not fully reflect a stock's "real" value • let's say thats a company's stock was trading at 1020. After doing extensive homework on the company, you determine that it really is worth 1500. • This leads us to one of the second major assumptions of fundamental analysis: in the long run, the stock market will reflect the fundamentals.

5. Fundamental analysis • The big unknowns are: 1)You don't know if your estimate of intrinsic value is correct; 2)You don't know how long it will take for the intrinsic value to be reflected in the marketplace. 

6. company-specific qualitative factors

7. company-specific qualitative factors

8. Technical Analysis • Fundamental analysis involves analysing the characteristics of a company in order to estimate its value. • Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. • Technicians are only interested in the price movements in the market.

9. The field of technical analysis is based on three assumptions:  • The market discounts everything. (stock's price reflects everything that has or could affect the company - including fundamental factors.) • Price moves in trends.  • History tends to repeat itself. 

10. Differences  • Charts vs. Financial Statements • Time Horizon  • Trading Versus Investing • The Critics (……..looks backward……. looks backward as well as Forward )

11. Can They Co-Exist?  • many market participants have experienced great success by combining the two. • some fundamental analysts use technical analysis techniques to figure out the best time to enter into an undervalued security. • Oftentimes, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved. 

12. Can They Co-Exist?  • some technical traders might look at fundamentals to add strength to a technical signal. • For example, if a sell signal is given through technical patterns and indicators, a technical trader might look to reaffirm his or her decision by looking at some key fundamental data. • Oftentimes, having both the fundamentals and technical on your side can provide the best-case scenario for a trade. 

13. SOURCEwww.investopedia.com/university/technical/:

15. Trends in charts • Trends are not always easy to see • In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction • but rather in a series of highs and lows. • In technical analysis, it is the movement of the highs and lows that constitutes a trend

16. Indicators of economic prosperity • Economic Growth (GDP: Gross domestic production) • Economic Development(HEWI: Human economic welfare Index) • Social Development • Sustainable Development • Quality of Life, Welfare and Well-being • Human Development Index (HDI) • Genuine Progress Indicator (GPI) • Weighted Index of Social Indicators (WISP)

17. Dow Theory • more than 100 years old • Dow theory was formulated from a series of Wall Street Journal editorials authored by Charles H. Dow from 1900 until the time of his death in 1902 • Due to his death, Dow never published his complete theory on the markets, but several followers and associates have published works that have expanded on the editorials. • Dow believed that the stock market as a whole was a reliable measure of overall business conditions

18. Dow Theory( The first basic premises) • All information - past, current and even future - is discounted into the markets and reflected in the prices of stocks and indexes. 

19. Dow Theory • Follower of Dow theory will look at the price movement of the major market indexes. • Once they have an idea of the prevailing trend in the market, they will make an investment decision. • If the prevailing trend is upward, it follows that an investor would buy individual stocks trading at a fair valuation. • This is where a broad understanding the fundamental factors that affect a company can be helpful. 

20. Dow Theory • Dow theory is much more suited to technical analysis. • An important part of Dow theory is distinguishing the overall direction of the market. • To do this, the theory uses trend analysis.  • An upward trend is broken up into several rallies, where each rally has a high and a low. • For a market to be considered in an uptrend, each peak in the rally must reach a higher level than the previous rally's peak, and each low in the rally must be higher than the previous rally's low. 

21. Upward Trend

22. Downward Trend • A downward trend is broken up into several sell-offs, in which each sell-off also has a high and a low. • To be considered a downtrend in Dow terms, each new low in the sell-off must be lower than the previous sell-off's low and the peak in the sell-off must be lower then the peak in the previous sell-off.

23. Dow theory identifies three trends within the market: 

24. Primary Trend • A primary trend is the largest trend lasting for more then a year. • The primary trend will also impact the secondary and minor trends within the market. • Regardless of trend length, the primary trend remains in effect until there is a confirmed reversal.

25. Secondary Trend • secondary trend is an intermediate trend that lasts three weeks to three months and is often associated with a movement against the primary trend. • A primary trend is the main direction in which the market is moving. • secondary trend moves in the opposite direction of the primary trend, or as a correction to the primary trend.

26. Minor Trend • The short term trend may last from a week up to as long as 6 weeks. • It is a minor trend • As it is very short term, it is a bit difficult • To analyse short term trends, and major focus remains on Primary and Intermediate

27. Dows Theory • The market has three phase: Accumulation Participation Distribution

28. Accumulation • Accumulation phase is the first phase of a primary bull market • where informed investors make buying decisions and there is no much noise in the market. • People accumulate stocks on declines and hold it for gaining in coming times. • The market may be down, but smart people think this is it and no more decline in markets lets accumulate

29. Participation • Participation is the phase when market starts showing signs of reversal • and people join in and starts confidently buying stocks, taking the market to rise at higher levels • As most of the macro data like GDP, Inflation, IIP, etc. works in the favour of the markets. In short, buying interests is at its peak.

30. Distribution • Once the markets are heated up with excess buying, we see smart investors booking profits followed by other people who accumulated in the second stage of participation. • Suddenly, lot of profit booking happens, and the markets are back in the selling spree. • And hence the market falls like pack of cards, which is nothing but the distribution stage.

31. Dows Theory • Volumes must support the trend: Dow was of the view that any run whether bullish or bearish must be confirmed with High volumes. • If the volumes are small, it means that market trend is still not confirm. • So, when markets rise, it must be accompanied with High volumes, and even when market falls, it should also comprise higher volumes for the trend to be confirmed.

32. Dows Theory • It is considered that the trend remains in force until it gives definite signals that it has reversed: • This principle is basic principle of Technical Analysis. Practically, if it is not true, the entire technical analysis would not make sense. • The principle is linked to the law of motion in general: • anything that moves is likely to continue to move until an external force does not prevent it. • So, don't take hasty decisions, wait for the confirmation that the trend has reversed its direction.

33. Types of Moving Average • 1. Simple moving Average • 2. Linear weightage Average • 3. Exponential moving Average

34. Simple moving Average • The simple moving average (or SMA) is an average of the closing price of a stock over a specified number of periods • When the stock price changes, the moving average changes accordingly.

35. For Example below table calculating the four day moving average for Reliance Industries Ltd. from 19th April 2010 to 3rd May 2010 (closed price)

36. Simple moving Average • Many individuals argue that the usefulness of this type of average is limited because each point in the data series has the same impact on the result regardless of where it occurs in the sequence • The critics argue that the most recent data is more important and, therefore, it should also have a higher weighting

37. Linear Weighted Average  • The linear weighted moving average is calculated by taking the sum of all the closing prices over a certain time period and multiplying them by the position of the data point and then dividing by the sum of the number of periods.

38. Linear Weighted Average  • ((90.9*(5/15))+(90.36*(4/15))+(90.28*(3/15))+(90.83*(2/15))+(90.91*(1/15))) • The weighted average is calculate by multiplying the given price by its associated weighting and then summing the values. In the example above, the weighted 5-day moving average would be $90.62.

39. Exponential moving Average • The exponential moving average (EMA) is a weighted average of the last n prices, where the weighting decreases exponentially with each previous price/period. • [Close - previous EMA] x (2 / n+1) + previous EMA • A 4-period EMA with prices of 1.5554, 1.5555, 1.5558, and 1.5560: • using the calculation [1.556 - 1.5558] x (2/5) + 1.5558 • EMA value of 1.5558

40. Exponential moving Average • This type of moving average reacts faster to recent price changes • The 12- and 26-day EMAs are the most popular short-term averages • For traders who trade intraday and fast-moving markets, the EMA is more applicable. Quite often traders use EMAs to determine a trading bias.

41. Moving Average Trading Uses • used for both analysis and trading signals • When the price is above its moving average it shows that the price is trading higher than it has (on average) over the period being analyzed • That helps confirm an uptrend. • When the price is below its moving average it shows that the price is trading lower than it has (on average) over the period being analyzed. • That helps confirm a downtrend.

42. Moving Average Trading Uses • When the price crosses above its moving average it shows the price is getting stronger relative to where it was, and • if the price crosses below its moving average it shows the price is getting weaker relative to where it was. 

43. Support and Resistance • You'll often hear technical analysts talk about the on going battle between the bulls and the bears, or the struggle between buyers (demand) and sellers (supply). • This is revealed by the prices a security seldom moves above (resistance) or below(support).

44. support • Support is the price level at which demand is thought to be strong enough to prevent the price from declining further. • The logic dictates that as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. • By the time the price reaches the support level, it is believed that demand will overcome supply and prevent the price from falling below support.

45. support

46. support • Support does not always hold and a break below support signals that the bears have won out over the bulls. • A decline below support indicates a new willingness to sell and/or a lack of incentive to buy. • Support breaks and new lows signal that sellers have reduced their expectations and are willing sell at even lower prices. • In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level.

47. Resistance • Resistance is the price level at which selling is thought to be strong enough to prevent the price from rising further. • The logic dictates that as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. • By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.

48. Resistance

49. Resistance • Resistance does not always hold and a break above resistance signals that the bulls have won out over the bears. • A break above resistance shows a new willingness to buy and/or a lack of incentive to sell. • Resistance breaks and new highs indicate buyers have increased their expectations and are willing to buy at even higher prices. • Once resistance is broken, another resistance level will have to be established at a higher level.

50. Trading Range • Trading ranges can play an important role in determining support and resistance as turning points or as continuation patterns. • A break above is a victory for the bulls (demand) and a break below is a victory for the bears (supply).