0Popular methods of interpreting the market movement
Given the Indian methods of data collection, one may also use the following techniques to understand future market movement:
- Price vs Volume change
- Advance-Decline Lines
- New-High and New-Low indicator
- Use of derivatives data selectively
Price vs Volume change for predicting market behaviour
Technical analysts believe that price and volume are closely related. There are four rules for Price vs Volume change:
a. A rising index with an increasing volume will indicate a bullish market and a "buy" signal as it reflects unsatisfied demand in the market.
b. A falling index with decreasing volume shows a bullish signal.
c. When volume tends to increase during index declines, it is a bearish signal.
d. When volume tends to decrease as the index rises, it is a bearish signal.
As the Exchanges provides daily volume data, by plotting volume as well as a market index, one can draw an inference about the market by looking at their direction of movement. Similarly, you can plot the volume data of individual securities along with their price movement chart to find a "buy" or "sell" signal.
Advance-Decline line
Every day several securities advance from its previous closing rate. Similarly, several of them fall off the last day's closing price. The cumulative net difference between the number of issues advanced and declined is used as an indication of the breadth of the market. When such data is plotted, it is called the advance-decline line. A hypothetical situation is given here to show how it is arrived at.
Note that the sign change (plus or minus) has nothing to do with actual figures. It merely shows the direction. Analysts generally specify the initial cumulative rate, a considerable number, say 25000, to keep the collective difference positive. If you plot it daily, you will get the advance-decline line. For analysis, you have to view the advance-decline line against the plot of the Index.
The rules are as follows:
a. A rising Index with a falling advance-decline line indicates that despite a rise in about 30 blue chips in the Index, many small stocks are beginning to turn down. It is an indication of a weakening market and gives a bearish signal.
b. A fall of Index with a rising advance-decline line gives a bullish signal.
c. Technical analysts also believe that when the cumulative number of advances exceeds declines by 2000 over ten days; the market may be "overbought", meaning that it is susceptible to some reactions. Similarly, if the cumulative number of declines exceeds advances by 2000 over ten days; the market may soon have a rebound.
If you are keen about plotting this chart, you can refer to the newspaper The Economic Times, which gives the daily share advance-decline data.
What are the New-High and New-Low indicator?
A rising market should normally view an expanding number of stocks hitting new high prices and decreasing new low prices. Conversely, a declining market is usually accompanied by an increasing number of new lows and a decreasing number of new highs. Many technical analysts believe that when the movement of New-High and New-Low data diverges from the movement of the market index, the movement of the former will usually provide a clue for the future price movement.
How are the charts prepared?
We generally use measures of momentum and overbought/oversold readings to aid in our interpretation of a stock. There are three different momenta for charting.
- Daily momentum for short term trading
- Weekly momentum for intermediate-term trading
- Monthly momentum for long term trading
What is a ROC chart?
A ROC chart or a Rate of Change chart intends to measure acceleration or deceleration in prices. It is conventional to plot this chart along with a price chart for interpretation. For instance, a 15-day Rate of Change (ROC) chart is obtained by taking the ratio of the current price to the price 15 days ago, which is converted to a percentage by multiplying with 100. If such 15 days ROC for each day is plotted, then you may get a 15 days ROC chart. A ROC chart will remain flat as long as the current price trend continues because the market returns will be constant. Any change in the price trend immediately shows up in the ROC chart, as the return will change. Thus basically, you can interpret whether the gross return from the market over constant intervals are undergoing any change, by glancing at the ROC chart.
Can one perform technical analysis, with voluminous data on price and volume?
A simple charting for selected scrips as well as the moving average analysis can be easily done if you collect price data from newspapers over a while. As technical analysis is meant for short-term investment analysis, data gathering for more than 2-3 months is not necessary. You can plot the graph on paper. If you have access to a computer, and if you know MS - Excel, this further simplifies your job. You can even derive data on advance-decline, new-high new-low etc. from the daily The Economic Times and accordingly work out your analysis. The purpose of these exhaustive explanations on analysis is to provide an in-depth understanding of the subject. In future, if you read any analytical write-up in an investment journal or newspaper, you would easily comprehend it. Of course, if you have a computer and technical analysis software, you may utilise them for additional benefits. All the techniques mentioned here have been incorporated in the Indian softwares.
