FUNDAMENTAL AND

TECHNICAL ANALYSIS

MODULE- 3
INDICATORS &
OSCILLATORS
 Indicators and oscillators

• Indicators and oscillators analysis is the new form of price-

volume charts. It is a mathematical examination of price and
volume data over a given period through a series of
calculations. The objective of this mathematical examination
is to forecast where and in which direction the price may move
in near future. Indicators look deeply into the past to forecast
future, whereas oscillators react quickly to the short term
changes in the prices.
 Continued…

• Indicators represent a statistical approach to technical analysis as opposed to a

subjective approach. By looking at money flow, trends, volatility, and momentum, they
provide a secondary measure to actual price movements and help traders confirm the
quality of chart patterns or form their own buy or sell signals.
• There are two primary types of indicators:
• Leading Indicators. Leading indicators precede price movements and try to predict
the future. These indicators are most helpful during periods of sideways or non-
trending price movements since they can help identify breakouts or breakdowns.
• Lagging Indicators. Lagging indicators follow price movements and act as a
confirmation tool. These indicators are most useful during trending periods where they
can be used to confirm that a trend is still in placing or if it’s weakening.
 Oscillators
• Oscillators are the most common type of technical indicator and
are generally bound within a range. For example, an oscillator
may have a low of 0 and a high of 100 where zero represents
oversold conditions and 100 represents overbought conditions.
• Generally oscillators are analysed along with the price chart.
Oscillators indicate trend reversals that have to be confirmed
with the price movement of the scrip. Changes in the price
should be correlated to changes in the momentum and then only
buy and sell signals can be generated.
 MOVING AVERAGE

• In statistics, a moving average is a calculation to

analyze data points by creating a series of
averages of different subsets of the full data set.
It is also called a moving mean or rolling mean
and is a type of finite impulse response filter.
Variations include: simple, and cumulative, or
weighted forms.
• A moving average is the average price of a
security over a set of amount of time.
 Continued…

• Simple moving average: also called arithmetic average in which

sum of all the past closing price over the time period and divides
the result by the number of prices used in the calculation.
• Exponential moving average: in which more weights is given to
the most recent data and less weight is given to the older data. It is
more responsive o new information relative tot eh simple moving
average. That is why it is the choice among many technical
traders.
 Moving Average Convergence Divergence(MACD)

• MACD, short for moving average convergence/divergence, is a

trading indicator used in technical analysis of stock prices, created
by Gerald Appel in the late 1970s. It is supposed to reveal changes
in the strength, direction, momentum, and duration of a trend in a
stock's price.
• Moving Average Convergence Divergence(MACD) is a trend-
following momentum indicator that shows the relationship
between two moving averages of a security's price. The MACD is
calculated by subtracting the 26-period Exponential Moving
Average (EMA) from the 12-period EMA.
 Explanation of previous graph

• Example of historical stock price data (top half) with the

typical presentation of a MACD(12,26,9) indicator
(bottom half). The blue line is the MACD series proper,
the difference between the 12-day and 26-day EMAs of
the price. The red line is the average or signal series, a
9-day EMA of the MACD series. The bar graph shows
the divergence series, the difference of those two lines.
 Relative strength analysis
• Relative strength analysis is based on the preposition that in
stock market, some shares perform better and some shares
perform worse than the market. Some of the shares are able to
out perform the market. In rising markets their prices move faster
than others and in falling markets, their prices decline slower
than others. This gives an idea about the strength of the share.
This strength can be measured by (i) relative strength ratio; (ii)
relative strength index.
 RELATIVE STRENGTH RATIO

• RSR is calculated as the ratio of the stock price on a stock

index of overall market or a sectoral index. For example, ratio
may be calculated between the share prices of M&M Ltd. and
sensex. If the ratio increases over time, It shows that the
particular share is outperforming the market or that sector. The
relative strength of a share may be considered as its ability to
outperform the market at turning points. It arises out of ability
of a share to recover earlier from a bear market or to peak out
earlier than the market.
 Relative strength index

• RSI was developed by Wells Wilder. It is an oscillator used to

identify he inherent technical strength and weakness of a
particular scrip or market. RSI can be calculated for a scrip by
adopting the following formula:-
• RSI = 100 – (100 / 1 + RS)
• RS = average gain per day / average loss per day
 Rate of change

• Rate of change indicates or measure the rate of change between

the current price and the price “n” number of days in the past.
ROC helps to find out the overbought and oversold positions in a
scrip. It is also useful in identifying the trend reversal. Closing
price are used to calculate the ROC. Daily closing prices are used
for the daily ROC and weekly closing prices for weekly ROC.
Calculation of ROC for 12 week or 12 months is most popular.
 Continued..

• ROC can be calculated by two methods. In the first method,

current closing price is expressed as a percentage of the 12 days
or weeks in past. Suppose the price of AB company’s share is Rs
12 and price twelve days ago was Rs 10 then the ROC is
obtained by using the equation 12/10 x 100 = 120%. In the
second method, the percentage variation between the current
price and the price twelve days in the past is calculated. It is
nothing but 12/10 x 100 - 100 = 20%. By this method both
positive and negative values can be arrived.
 Continued..

• Main advantage of ROC is the identification of

overbought and oversold region. The historic high and
low values of the ROC should be identified at first to
locate the overbought and oversold region. If the scrip
ROC reaches the historic high values the scrip is in the
overbought region and a fall in the value can be
anticipated and vice versa.
 MARKET INDICATORS

• Market indicators are sued to analyze the behaviour of the overall market. The
overall market movements affect the individual share price. Hence forecasting is
considered to be more reliable than the individual forecasting. Some of the
market indicators are discussed hereunder:
• Breadth of the market
• Market breadth index
• The odd lot ratio
• Put call ratio
• Short sales position

• Mutual fund liquidity

 Breath of the market

• The net difference between the number of stock

advanced and declined during the same period is the
breadth of the market.
• Advances mean the number of shares whose prices
have increased from the previous day’s trading. This is
easy to plot and watch indicator because data are
available in all business dailies.
 Market breadth index

• Market breadth is a technique used in technical analysis that attempts to

gauge the direction of the overall market. It is basically the advance
decline ratio. Market breadth indicators analyze the number of companies
advancing relative to those declining. Positive market breadth occurs when
more stocks are advancing than are declining and suggests that the bulls are
in control of the market's momentum. Conversely, a disproportional
number of declining securities is used to confirm bearish momentum.
• If both stock index and market breadth index increase, the market is
bullish; when the stock index increase but the breadth index does not, the
market is bearish.
 The ODD LOT RATIO

• An odd lot is an order amount for a security that is less than the
normal unit of trading for that particular asset. Odd lots are
considered to be anything less than the standard 100 shares for
stocks.
• The Odd Lot Purchases/Sales Ratio is a dumb money indicator that
measures the daily ratio of odd lot purchases compared to odd
lot sales transactions. Odd Lots are transaction involving less than
100 shares (Dumb Money). The contrarian theory assumes
that odd lotters are inexperienced and therefore always wrong.
 PUT CALL RATIO
• The put-call ratio is a popular tool used by investors to gauge the
overall sentiment (mood) in the market. The ratio measures how many put
options are being traded relative to call options. The put-call ratio is
calculated by dividing the number of traded put options by the number of
traded call options. 
• A rising put-call ratio - or greater than .7 or exceeding 1 - means equity
traders are buying more puts than calls and indicates a bearish sentiment is
building in the market.
• A falling put-call ratio - or below .7 and approaching .5 - is considered
bullish since it means more calls are being bought versus puts. In other
words, the market has a bullish sentiment. 
 Short sales position
• A short sale is the sale of an asset or stock the
seller does not own. It is generally a transaction
in which an investor sells borrowed securities
in anticipation of a price decline; the seller is
then required to return an equal number of
shares at some point in the future. In contrast,
a seller owns the security or stock in a long
position. 
 Mutual fund liquidity
• A mutual fund liquidity ratio is reported by mutual funds to
provide investors with insight on how much cash the fund is
holding. Companies may report cash ratios or cash and cash
equivalent ratios, which is a broader measure encompassing
cash equivalents that can be easily liquidated within a short
period of time. The ratio is a simple percentage dividing either
the total cash or the total cash and cash equivalents by the
fund’s total assets.
Criticism or weaknesses of technical analysis

1. Difficult in interpretation
2. Frequent changes
3. Unreliable change
4. False information less precise tools
5. No one indicator is infallible