TECHNICAL ANALYSIS

8 AND
MARKET EFFICIENCY

CHAPTER THEME
andother market related
examine historical price and volume dataTie
nvestmenttoanalysts often patterns in price movements objective.is to forecast
ndicatorS identifiy past trends and rather than on
the tuture prices Moresemphasts is laid on Chartgaphs and indicators chapter on
fundamentals.related to earninga of the fim. Limitedattention iS also paid n this
the concept of market eficiency in terms of its ability to rapidly adjust
for the suppiy öf
antormatuon. Disagreement among the fundamentálists, tecinigians and he technictanprOponents O
market eficiency persists, stillthe understanding of tools and fechniques or a and
marketeiiciency.will heln understanding the price jbehaviour in the caoitalmarket
CHAPTER PLAN
Fundamental andTechnicalAnalysis
9BasicTenelsandPremises of TechnicaApnalys
DowTheory
Elliott|Wave Theory
0Pice and Volume Chart
Bar chart
n acyar
Poirand jgure Ghart
Candléstick Chart
0Piice Patterns Analysi
Headand Shouldets
agsandetrianges
Upportand ResistanceLevels
ndicator Analysis
Simple Moving Average
EXponential Moving Average hS1 wsdy
Moving Average ConvergenceiDivergence
Relative Strength Analysis
Rate of Change
Market Indicators in
Breadth of the Market
PutCáll Ratio 9 e t i N
hort'salesPosition tdtie
Weaknesses and Shortcomings of Technical ApalysisataAE
Effective.Market Hypothesis es
Weak, Semi-strong &Strong Form
EF Fama Model
Testing for Market Eficiency iK i n
312 Fundamental, Techiical and Efficient Market Hypothesisia t
Points To Renmember
Objective Lype Questions,and Self-Review Assignments
 INVESTMENT ANALYSIs AND PORTFOLIO
MANAGEMENT
Chapter 7 dealt with the fundamental analysis which makes an attempt to
forecast the
security prices on the basis of economic, industry and company analysis. Investment
as per fundamental analysis is based on the dividends and earnings expectation and
decision
the risk
return framework of the investor. The alternative approach to examine the
securities prices
behaviour is the Technical Analysis.
Technical analysis is based on the proposition that the securities prices and
volume in
past suggest their füture price behaviour. The technical analysts believe that the demand
and supply of securities are reflected in their prices and volume and the
past pattern of
prices and volume can be used to predict whether prices would be moving higher or lower.
Technical analysis is based on the concept that past information on prices and volume can
give an idea of what lies ahead. It emphasises that
securitiesA trend in prices is believed
prices and changes therein can be forecast by studying theto continue unless there is
market data. A trend in prices is believed to continue
there is some definite information
unlesS some definite information
leading to change, ana this leading
trend in prices can be used to predict the future.
to change.
Technical analysis is amethod of evaluating securities by |It does not
attempt to
analysing information generated by stock market acuvitiesmeasure the security's|
Past Prices and Volume. It does not attempt to measure the
intrinsic value rather it
security's intrinsic value rather it looks at charts for
patterns|looks at charts
for patterns
and other indicators to forecast the price behaviour. Technical and other indicators to
analysis operates on the premise that market prices at anyforecast the price behaviour.
time reflect all known factors affecting demand and supply for
securities. A technical analyst does not focus on evaluating these factors directly but on the
analysis of market prices themselves.
Technical analysis may also be called the "ket analysis because it uses the market
record and market information to predict the volume and prices. It is based on the principle
that let the market narrates its own story. Technical analysis is a reflection of the idea
that the capital markets move in trends. It attempts to identify changes in trends at an early
stage so that investors can rely their decisions on the expected changes. In technical analysis,
the basic assumption is that an investment posture should be maintained until a reversal of
the existing trend is indicated. The job of a technical analyst is
i) To identify the trend in prices, and
) To identify when the trend will end and the prices would move in the opposite
direction. Of course, he should be able to differentiate the reversal within the trend and real
change in the trend.
Fundamental and Technical Analysis. Fundamental and Technical Analysis are two
types of security analysis. Technical analysis is all about studying securities prices and a few
Oscillators derived therefrom, and not taking any reference to the balance sheet and income
statement, the assumption being that the markets are efficient and all possible price
sensitive information is reflected in the price movements. These two differ in their
approaches, assumptions and the methods of analysis. Some of the differences between the
two types of analysis are:
1. Sources of Information. Fundamental analysis is based on the information relating to
economy, industry and the particular company. This information is generally available in
the publications of the Government, other agencies and company itself. On the other hand,
the technical analysis is based on the information relating to prices and volume of
TECHNICAL ANALYSIS AND
MARKET EFFICIENCY
transactions in the capital market. This 267
predict behaviour. So, the fundamental information is analysed by the technical
whereas the technical analysis is based on information analysts t
2. Type
analysis is based on the external
information internal to market. to market
of Information. In
growth, earnings, etc., whereasfundamental analysis, the data used are related
the data used in
prices, volume of transactions, market technical analysis are related to sales,
index, etc. to securities
3.
Objectives. In fundamental analysis, the
value of the share based on objective of the analysis is to assess the
variables. However, technical expected performance of the intrinsic
a
analyst company and other related
where there could be
reversal
attempt to identify the trend in
a in the trend. prices and to indicate
4. Types of Techniques used The fundamental
techniques valuation models basedanalysis based
of ratios, and (iü) is (i) the accounting on

produce estimate of the intrinsic value.

an on discounted
cash flow
charting technique (discussed later in the On the other hand, technical analysistechniques,
to
is based on
5. chapter).
Emphasis. In the fundamental analysis,
movements. If the
earnings are the, emphasis is on the cause of price
technical expected grow, the prices will also increase.
to
analysis, the
emphasis is on what should be However, in
the trend and behaviour of
near future.
Moreover, in fundamental
while in the technical analysis the price movement is performanceprices in
based
analysis, the price movement is based on market forces
supply. of demand and
6. Basic
Philosophy. The basic philosophy in fundamental analysisis that the share has a
real worth or
would
have a real worth in future. An investor can beat the
near
taking an early decision. On the other hand, the basie market by
that the share prices philosophy
show identifiable trends that can be
in technical
analysis is
identification of changes. The fundamental exploited by
investors by early
what to invest in ? analysis is designed to answer the
question:
whereas, the technical analysis answers the question: When to invest in?
However, the above differences need not be taken to imply that the
technical analysis are mutually exclusive. The technical fundamental and
information generated by a fundamental analyst. analysts do not ignore the value of
eventually 'close in on' the intrinsic or fundamentalShare pricesThe technical analysts do
change in market fundamentals would result in values. Anot ignore the value of |
change in
price information
equilibrium level, an | a fundamentalgenerated by |
but before the market adjust to a new
investor can exploit the market. analysts.
In fact, the technical analysis is used to supplement the
analysis. fundamental
Fundamental analysis allows the analyst to assess
with the return, but these figures do
the share return and the risk attached
not indicate any In fact, the technical analysis is
investment decision. However, the technical
can help time the investment actions
to
used analysis to supplement the fundamenta
of buying and analysis.
selling the shares.
Technical analysis secms to be more dynamie than fundamental analysis whích depends
on corporate events such as quarterly results or special announcements. If fundamental
analysis was reliable indicator of trends, prices would fluctuate only four to five times a year
around quarterly results or special announcements such as merger or acquisitions, etc. But in
practice, the prices fluctuate daily and even moment to moment. If the prices fluctuate so
often, is there a way to forecast them ?' Yes, there is technical analysis to help an investor.
 PORTFOLIO MANAGEMENT
268 INVESTMENT ANALYSIS AND

BASIC TENETS AND PREMISES OF TECHNICAL ANALYSIS

Technical analysis is based on certain premises such as
(0) Market price of a security is related to and determined by the interactions of demand
and supply forces operating in the stock maket.
(i) Stock prices tend to move in trend for a long period, nevertheless, there may be minor
fluctuation in between in the market. This implies that the movement in prices is
continuous in a particular direction for some time.
) Reversal or shift in trend in prices may occur because of change in demand and
supply factors.
Gv) The change in demand and supply factors can be detected earlier with the help of
charts and graphs.
() Price patterns projected by price movements in the market tend to repeat themselves
and can be used to forecast future price behaviour.

Various tools and techniques are used by technical analysts to predict the price
behaviour. These can be broadly classified into
1. Charting, the basic tool of technical analysis, and
2. Select Market Indicators.
These have been discussed hereunder.

CHARTING: THE BASIC TOOL OF TECHNICAL ANALYSIS

Charting is the key activity in the technical
analysis. 1t 1s The charts and graphs are
already noted that in technical analysis, the basic
motive 1s to used as the basic tools to
identify the price trend on the basis
of historical data. Tneidentify the trends in
trend is then used to forecast the future behaviour. The price
and volume data on securities
the are
basieraw
material used prices
by a technical analyst and the charts and graphs are used as the basic tools to identify the
trends in prices. The technical analysts may also be called chartists because they use charts
and records of historical prices and volumes to identify the trend and patterns in prices.
It may be noted that the technical analysis can be used either for a specific share or for
the market in general. In case of a specific share, the past data of that security are used to
show charts while in case of market, the aggregate data on pricos and volumes are used to
prepare charts. In technical analysis, both the price data and the volume data are studied
simultaneously. This is true for specific shares as well as for the market.
Prices and Price Charts. In the charting activity, it is the prices of securities that are
plotted and shown in the graphs and charts, A security is traded at different prices on any
particular day. Out of these different price quotations, four prices are relevant and
important. These are :
i) Opening Price. This is the rate at which the first transaction takes place for the day.
This price may be less, more or equal to the closing price for the previous trading day.
(i) Highest Price. This is the highest rate for the day, at which a transaction has taken
place. It may be noted that simply a bid/offer rate is not relevant, rather a transaction must
have been entered into.
 EFFICIENCY
MARKET
ANALYSIS
AND
TECHNICAL

day, at which a transa

rate 1or the ha,
may be tako
lowest
is the
Lowest Price. This and lowest traded price he
(iil) between the highest
Difterence
place.
range for the day. the last
transaction for the day traded.
is traded. Out of
rate at which
Price. It is the for two reasons
(iv) Closing is the most relevant

the closing price the basis of closing prices of the

the four prices, calculated on

indices for the day

are

(a) The stock

constituent securities, and that day
with the opening price for
day be compared
can
for particular trend in prices.
(6) Closing price a
previous day to identify a
or the closing price
for the
for charting
Generally, the closing prices are used over several trading days. X-axis
prices for a security
A price chart shows the closing for the day.
shows the time and Y-axis is
taken to represent the price

CHECKTEST YOURSELE 1
was73 while the opening price today
Closing price for yesterday ofshares of XLtd lower also ? Bxplain.
is76. How is the opening price higher ?.Canbe
(Explain OHLC.
Charles Dow, is considered to
DOW THEORY. The Dow Theory, named after its originator,
be first theory of technical analysis. It is still regarded as the
basis of all other techniques
much of the substance of
used by technical analysts. In fact, it is the Dow Theory from which
the technical analysis has branched out.
Dow Theory is based on the hypothesis that the stock market Three types of specific
does not perform on a random basis. Rather, it 1s guided by some| trends have been
specified trends. The likely market trend in future can be predictednamed in Dow Theory.
by following these,trends. Three types of' specific trends have been
named in Dow Theóry. These are:

(a) Primary Trend. It is a long-range trend in price and may carry on even for number of
years. It takes the entire market up or down. It may be characterised as bullish or
bearish in nature.
(b) Secondary Trend. Secondary trend or trends appear within a primary trend and may
last for few days or few weeks or few months, Secondary trends show interruptions in
primary trend and act as a restraining force on the primary trend. The secondary trends
tend to correct deviations from the primary trend boundaries of price movements.
(c) Minor Trend. Minor trends refer to day-to-day trend or movements in prices over few
days. The minor trends, being of very short duration, have little analytical value.
These three types of trends hare been shown in Fig. 81
Fig. 81 shows that there are day-to-day movements, secondary movements (prices falling
over a period of say, a month), and the primary trend (the prices are increasing over time. It
also shows that secondary downtrend (decrease in prices) will be of a shorter duration then
the following secondary upswing (increase in prices). In terms of Dow Theory, the upward
as bear
primary trend is known as bull market, and the downward primary trend is known
market. Fig. 81 has shown a bull market as the suecessive highs are reached after every
 INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

Price
Primary Trend

M i n o rT r e n d d

Secondary Trend
(Corrections)

-Time

Dow Theory
Fig. 8.1:Different types of Trends as per
bear market where the prices
correction in prices. Opposite of bull market is the
secondary
are successively going
down.
trend is positive and upward
despite three secondary
In the Figure 8.1, the primary is also known as
downward. The secondary
trend or movement in prices
movements that are there is an
case of bull market,
after a secondary correction,
technical correction. In bear market, after a
movement and it penetrates previous
heights. In c a s e of
upward previous lows.
correction (increase), there
is a downward move which penetrates
instant
secondary depend upon the
in prices, also known as ripples,
The day-to-day movements do not pay attention to these
forces. The technical analysts usually
demand and supply
minor trends.
would continue for a
assumed that a pattern (primary trend)
Theory, it is
Under the Dow movement. However, the
confused by a secondary
long period and an analyst need not be
of a bullish trend is indicated by
a new
end. For example, reversal
primary pattern must the previous high. This is known as abortive
which a recovery tails to exceed
pattern in low. This is shown in Figure 8.2.
low penetrates previous
recovery and a new

Price
Aborted Recovery

~-Primary Trend
Penetration of
previous low

Fig. 8-2: Aborted Recovery and Trend Reversal in Dow Theory

TECHNICAL ANALYSIS AND MARKET EFFICIENCY 271

Following points are worth noting about the Dow's Theory

) No individual investor can affect the basic trend in the market i.e, the primary trend
cannot be manipulated.
(t) Though the Dow Theory is of much usetechnical analyst, there is a problem ofa
to a

abortive recovery need not be considered as an end of the bull

run.
falsesignal. Every
Investor must wait for the confirmation of the trend reversal. The Dow Theory helps
but it fails to tell when the trend will come to an end or
in indicating a primary trend
will reverse.
ELLIOTT WAVE THEORY. Another theory that attempts to explain long-term
pattern in
stock theory is that the
price behaviour is the Elliott Wave Theory. Basic proposition of
It states that the long- term
in the market can be described as a set of wave patterns.
prices
major patterns may consist ot five successive steps or mve waves It states that the long
In case of bull market, the set of five is follows: the first term major patterns, may
waves as

wave is upward, the second is downward,

the third is upward, the consist of five successive
In case of bear
fourth is downward and the fifth wave is upward.
ep E wbe
reverse pattern follows i.e., downward, upward,
market, the 83 shows the Elliott Wave Theory in Bull Market
downward, upward and downward. Figure
(A) and Bear Market (B).

Prices Prices

2A

Time
Time (B)
A)

8:3: Eliott Wave Theory: Bul Market (A) and Bear Market (B)
Fig.
It
describes the basic movement in share prices.
Wave Description. Elliot Wave Theory In of
or downward). case
in a given direction (going upward
states that there will be 5 waves
5 can be described as follows:
bull market (upward trend), these ways
initial move upwards. This may be
caused by a relatively small
Wave 1. The stock price make
that the previous price
sudden (for a variety of reasons) feel
number of people that all of the to go up.
it is worth buying and thus causing the price
of the stock was cheap and therefore
in the original
overvalued and enough investors who were
Wave 2. The stock is considered stock to go down.
c a u s e s the
wave to consider that the
stock was overvalued take profits. This
lows.
However, the stock will not make it to its previous
More investorsfind out about the stock
Wave 3. This may be the longest and strongest wave.
created at
higher and higher price. This
wave usually exceeds the tops
and they buy it for a
1
the end of wave
 MANAGEMENT
ANALYSIS AND PORTFOLIO
INVESTMENT

272
considered
because the stock is again
Wave 4. At this point, investors again take profits that are still
more investors
tends to be weak because there are usually
expensive. This
wave

bullish on the stock.

They will come up with
that most investors are driven by hysteria.
Wave 5. This is the point the stock
news. Consequently,
of to buy the stock which has very little negative
lots reasons
stock will move into one of two patterns.
becomes overpriced. At this point, the
w a v e s and are in the
number 1,3 and 5 are known as impulse
Out of these, the waves
two number 2 and 4, are correction waves and
direction of the basic movement. Other waves,
of basic movement. After the completion
of one set of 5 waves, the
are against the direction
the share
known as ABC correction. In ABC correction,
share prices may show a correction,
price will go down/up/down in preparing
for another set 5 waves. Waves A andC will be
of
B will be in the s a m e direction a s that of
against the direction of basic movement and wave and a fresh
the basic trend. After the of eight (5 + 3) waves, the full cycle is over,
completion
set of waves may arise.
Dow Theory and Elliott Wave Theory are fairly simple and help identifying the simple

trends with short-term deviations around those

trends. Over the years, several
long-term
ha the common
other intense patterns and charts have been developed. All these patterns
prices. Some of these charts
objective that the future prices can be extrapolated from
current
related to price and volume data, some
and techniques are related to price pattern, some are
a long list of these new
are related to average prices, or some other variables. There is

techniques being adopted and used by technical analysts.

be classified
Various tools, techniques, charts and patterns used in technical analysis can
into three groups as shown in Table 8.1 and have been discussed below.

Table 8.1: Tools, Techniques and Indicators in Technical Analysis

Price Patterns Tools and Indicators

Price&VolumeCharts
1. Trend 1. Simple Moving Average
1. Bar Chart
2. Line Chart 2. Head and Shoulders 2. Exponential Moving Average
3. Point and Graph Chart |3. Triangle 3. Moving Average Convergence
4. Candlestick Chart 4. Flags Divergence
Relative Strength Index (RS1)
5. Support and Resistance 4.
Level 5. Market Indicators

PRICE AND VOLUME CHARTS

A price chart is a simple two-axis chart with time on he
A-axisA price chart is a simple
and price on the Y-axis. The prices and price movements O any| two-axis chart with time
share or any index over a period of time can be shown on the price on the X-axis and price
graph. The prices used for preparing a price graph are generally on the Y-axis.
closing prices for each day or for each period (say a month). In
certain cases, combination of opening price, closing price, high and low price for a day can
also be shown. A price chart can be prepared on arithmetic scale or logarithmic scale. In the
former, the price units have equal difference on the vertical axis while in the latter, the
prices are shown on a percentage growth basis. So, in a logarithmic price chart, there is equal
vertical distance between same percentage of price change.
 EFFICIENCY
ANALYSIS AND MARKET
TECHNICAL

for a day can also be shown

that
In a price chart, the volume of transactions the volume information is disCase
Chart. In this chart,
may be
called a
Price-Volume
information. These volume bars be nrdy
can
below the price
individual histograms just decrease in price on that day.
Investors can find out
in different colours to
show increase or downs' occur in row and how
"how many ups or
the buying and selling interest on the bas1s of
moved in opposite direction.
the volume moved on the days when prices
charts are being used in practice by technical
Different types of price and price-volume
analysts. These are discussed hereunder.
used to show the price movements
and
1. Bar Chart. Bar charts have been commonly
volume information is shown on daily
accompaniedvolume over a period of time. Price and
basis and it can taken up as a period of 1 month or half
comparative presentation over a

and low) are shown as a bar. The

year or so. In a bar chart, each day's price boundaries (high
tick on the high-low bar.
closing price and opening price on that day is shown as a horizontal
The volume of transaction is also shown as vertical bar in the lower portion of the chart. Fig.
S-4 shows the bar and information depicted by a bar.

High High

FClose Open

Open- Close

Low Low

(A) (B)
Fig. 8.4: Elements of a Price Bar

Figure 8.4 shows that each price bar has four elements i.e., high, low, open and close
price. It is also called a OHLC Bar. The open price is shown on the left side and the close
price is shown on the right side of the bar. In Figure 8.4, two bars have been shown. The
right hand bar (B) shows that the open price was higher than the close price and there was a
selling pressure. On the other hand, the left hand bar (A) shows that the closing price was.
higher than the open price and depicts the buying pressure in the market. These bars when
shown for successive periods (days) result in a Bar Chart as shown in Figure 8.5. In Figure
8.5, price and volume data for a security are shown for 14 days.
For example, on Date 1, the highest price 640,
was
| Generally volume increases
lowest price was 510 and the closing price was 540. The with upward trend in
total volume on that day was 18,000 shares. Studies based on | Prices and volume |
bar charts have shown that volume goes with the the| with
price trend,ecreases
L.e., generally volume increases with upward trend in prices oWwara trend in prices.
and volume decreases with the downward trend in prices.
Bar charts are popular among technical analysts because these charts have a lot of visual
presentation and, moreover, are easy to draw.
 E
t h a tcase, it
displayed by
be prepared
c a n find out
TECHNICAL ANALYSIS AND MARKET EFFICIENCY 275

In Fig. 8-6 X' represents price increase and '0'represents price decrease. A price change
(increase or decrease) of R2 is considered significant. Suppose, the initial price is 30, it is
shown as i n the first column. It increases to R31.50 on the same day and touches 32.25
on the next day. As the price has increased by 2 (paise ignored) from the level of7 30,
another X' is entered in the first column. Now, there are two X in the first column showing
that the price has increased from 30 to T 32 but the period (number of days) over which
such change has been recorded is ignored. Another X will be added to the same column
when the price increases by another 2, ie., reaches34 and so on. A reversal trend has also
been shown in the Fig. 8-6. Suppose, price increases up to R33.60 but the number of X' in the
first column would remain 2 only. 2 Xs would remain so long as the price does not reach
34. In case, the price goes down to 29.80 after a few days, a 'O' will be marked in the next
column, against the price bend ofF 30, and so on. The share is now in the downward cycle
and will renmain there unless a reversal of 72 occurs. For example, over next few days, the
price goes down up to 25.75, total 3 O' would appear. Thereafter, if the prices again start
increasing, the "X' would be written in the next column and so on. Alternative reversals of
price trend will be shown by successive X and'O' columns.

Price 4
(Rs)

O OL
4

20
Time

Fig.8-6: Point-and-Figure Chart

forces
Fig. 8-6 shows that even if the time dimension is ignored, the demand and supply
are at work. It depicts that in the initial period (may be number of days or weeks or months),
the price increased gradually but then there was a downward trend and the price decreased.
It may be noted that every column in the chart can contain either X's or O's but not both.
When prices reverse, they must reverse by a reversal amount betore a new column is created.
The Point and Figure Chart allows for a visually clear sense of support and resistance
trend in prices is
levels. Breakouts from a particular level can give indication of where the movement,
consolidation sideways
future. The longer a price plot moves in a
or
headed in the
the stronger the reaction can be on a breakout.
 276 INVESTMENT ANALYSIS AND PORTFOLIO MANAGEMENT

These charts allow investors to analyze various price These charts allow investors to
formations and spot buy and sell signals through|
analyze vurious price formations
trendline penetrations and breakout from support or and spot buy and sell signals
resistance levels. Point and Figure charts also allow for a through trendline penetrations
quick assessment of the overall trend of the market and| and breakout from support or
in potentially determining whether price is at risk of reststance levels.
reversal.
4. Candlestick Chart. Candlestick Chart can be considered as an extension of bar chart. In
addition to the price data(shown in bar ehart), the candlestick chart also shows the trend in
prices for the day. In candlestick chart, the price data for a day is shown by a vertical candle
with a vertical line drawn through it. The candle may be shaded or clear. A clear candle
represents the increase in price during the day (i.e., the closing price is higher than the
opening price for the day). A shaded candle represents the decrease in price (i.e., the closing
price is lesser than the opening price for the day). The top and bottom points of the line
passing through the candle represents the high and low price respectively for the day. A
candlestick for the day represents following price informations:
G)Opening and closing prices for the day,
(i) Highest and lowest prices for the day, and
(iüi) Increasing or decreasing trend in price during the day.
In order to understand the candlestick chart, it is desirable to first understand howa
candlestick is created. Figure 8.7 shows the elements of a
candle
High High
I Close
Open

White Shaded
Real Real
Body Body
Open Close

Low Low

Fig. 8.7: Elements of a Candlestick

Figure 8.7 shows that there are five elements of a candle: Open, High, Low, Close and
shade of the body. The main body (box) is also called the real body and it represents the
range between the open and close prices. In Pigure 8.7, the let side white candle shows that
the closing price was higher than the open price and the right side black candle shows that
the close price was lower than the open price, thus depicting price movements during the
day. Many types of candles are created through daily price action. A clear candle is an up day
and a dark candle is a down day. The wick on the top of the candle shows the high of the day.
The wick on the bottom shows the low of the day. If there is wick then the opening
no

closing price, depending on the colour of the candle was the high or low of the day. Candles
or

may take different forms and shapes depending upon the price movement. Some of the
shapes are shown in Figure 8.8.
TECHNICAL ANALYSIS AND MARKET EFFICIENCY

(A) (B) (C) (D) (E) ( (G)

Fig. 8.8: Different Shapes of Candles
Different candles shown in Figure 8.8 can be described as follows:
(a) Normal Black Candle When Close price is lower than Open price.
(6) Normal White Candle: When Close price is higher than Open price.
(c) Shaven Head Candle When Close price is
(d) Shaven Bottom Candle: When Close price is
highest for the day.
(e) Spinning Tops Candle:
lowest for the day.
When Real Body is small. (May be white or black).
Doji Lines When there is no Real Body showing that open and close prices
for the day are same.
g) Hammer Candle When open price is highest and is hammered down for a low
level
testing during the day.
A candle graph is visually clearer when
looking for a quick digestion of the price action
that occurred on any given day. The graph itself has a horizontal and a vertical axis. The
horizontal axis represents time. All units on the horizontal axis are measured in days. Each
candle represents the price action for each trading day. The dates of the trading days are
indicated at the bottom of the graph. It can be prepared on weekly or monthly basis also. For
example, one candlestick may represent the price information for one week or one month.
Fig. 89 shows a candlestick chart.

Price H i g h Price, 108

(Rs) Closing Price, ? 107

Opening Price, ? 104

Low Price, 103

Days
Monday Tuesday Wedhesday Thursday Friday

Fig. 8-9: Candlestick Chart for 5 Working Days

and
In Fig. 8:9, one candle represents price information for one day. Fon Monday
the candlesticks are shaded representing that the opening prices
on tha.day are
Wednesday,
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