Fundamental analysis and technical analysis

1. FUNDAMENTAL
ANALYSIS
Mohammed Umair

2. WHAT IS FUNDAMENTAL ANALYSIS?
• Fundamental analysis is a technique that attempts to determine
a security‘s value by focusing on underlying factors that affect a
company's actual business and its future prospects.
WHY FUNDAMENTAL ANALYSIS?
Fundamental analysis answers the following question
1. Is the company’s revenue growing?
2. Is it actually making a profit?
3. Is it in a position strong-enough to outrun its competitors in
the future?
4. Is it able to repay its debts?
5. Is management trying to "cook the books"?

3. FUNDAMENTAL ANALYSIS
• Fundamental analysis can be composed of many different aspects:
the analysis of the economy as the whole, the analysis of an industry
or that of an individual company.
FUNDAMENTAL
ANALYSIS
Economic
Analysis
Company
Analysis
Industry
Analysis

4. ECONOMY ANALYSIS
• The performance of a company depends much on the performance
of the economy if the economy.
• The first step to this type of analysis includes looking at the
macroeconomic situation.

5. ECONOMIC INDICATORS AND THEIR IMPACT ON THE STOCK MARKET
INDICATOR FAVOURABLE
IMPACT
UNFAVOURABLE
IMAPACT
GDP/GROWTH RATE HIGH GROWTH RATE SLOW GROWTH RATE
DOMESTIC SAVINGS
RATE
HIGH LOW
INTEREST RATES LOW HIGH
TAX RATES LOW HIGH
INFLATION LOW HIGH
IIP/INDUSTRIAL
PRODUCTION
HIGH LOW
BALANCE OF TRADE POSITIVE NEGATIVE
BALANCE OF
PAYMENTS
POSITIVE NEGATIVE

6. ECONOMIC INDICATORS AND THEIR IMPACT ON THE
STOCK MARKET
INDICATOR FAVOURABLE
IMPACT
UNFAVOURABLE
IMAPACT
FOREIGN EXCHANGE
POSITION
HIGH LOW
DEFICIT
FINANCING/FISCAL
DEFICIT
LOW HIGH
AGRICULTURAL
PRODUCTION
HIGH LOW
INFRASTRUCTURAL
FACILITIES
GOOD NOT GOOD

7. Company Analysis
• It involves a close investigative scrutiny of the companies financial and
non financial aspects with a view to identifying its strength, weaknesses
and future business prospects.
Company Analysis
financial
non financial
• Non Financial Factors
Marketing success
Business Model
Competitive Advantage
Management
Corporate Governance

8. Company Analysis-Non Financial
Aspects : History, Promoters
and Management
Review Questions
How old is the company?
Who are the promoters?
 Is it family managed or professionally
managed?
What is the public image and reputation
of the company, its promoters and its
products?
Aspects : Technology, Facilities
and Production
Review Questions
Does the company use relevant
technology?
 Is there any foreign collaboration?
Where is the unit located?
Are the production facilities well
balanced?
 Is the size the right economic size?
 What are the production trends?
What is the raw material position?
 Is the process power- intense?
 Are there adequate arrangements for
power?

9. Company Analysis-Non Financial
Aspect: Product range, Marketing, Selling and Distribution
Review Question:
 What is the company‘s product range?
Are there any cash cows among the product portfolio?
 How distribution-effective is the marketing network?
What is the brand image of the products?
 What is the market share enjoyed by the products in the relevant segments?
What are the effects and costs of sales promotion and distribution?
Aspect: Industrial relations, Productivity and Personnel
Review Question:
How important is the labour component?
What is the labour situation in general?
Aspect: Environment
Review Question:
Are there any statutory controls on production, price, distribution, raw material, etc?
 Is there any major legal constraint?
What are the government policies on the industry (domestic as well as related to imports and
exports of the final products and raw materials)?

10. SWOT
ANALYSIS
Strengths
• Latest Technology
• Lower delivered Cost
• Established products
• Committed manpower
• Advantageous location
• Strong finances
• Well- known brand names
Weaknesses
• Loose controls
• Untrained labour force
• Strained cash flows
• Poor product quality
• Family funds
• Poor public image
Opportunities
• Growing domestic
demand
• Expanding export markets
• Cheap labour
• Booming capital markets
• Low interest rates
Weaknesses
• Price War
• Intensive competition
• Undependable
component
• Suppliers
• Infrastructure bottlenecks
• Power cuts

11. FACEBOOK SWOT
Strengths Integration with websites and applications
More than a billion active monthly users
Excellent users experience
Understanding of user’s needs and behavior
Weaknesses Weak CTR of advertisements
Social network lacks of some features
One source of revenues – advertisements on Facebook
Attitude towards users’ privacy
Lack of website customization
Weak protection of users’ information
Opportunities Increasing number of people using Facebook through mobile devices
Expansion to China
Diversify sources of revenue
Open Facebook marketplace
Threats Increasing number of mobile internet users
Users using ad-block extensions
Slow growth rate of online advertising
Identity thefts
Weak business model

12. Industry intelligence
An industry intelligence is a business tool carried out to assess profit potential
and the complexity of a particular industry.
1. Industry intelligence is assessed based of key factors relating to the
industry such as the history of the industry,
2. Analysis of the industries financial performance,
3. Industry life cycle,
4. A review of how differing trends such as seasonal fluctuations affect the
industry,
5. External influences on the industry such as government laws and
6. A review of levels of competition both present and future for the
specific industry.

13. Porter’s Five Forces- Industry
Analysis:
1. Industry rivalry: Indicates degree of competition among existing
firms, cut throat competition leads to reduced profit potential
for companies in the same industry
2. Threat of substitutes: Availability of substitute products or
services will limit a firm’s ability to raise prices
3. Bargaining power of buyers: It represents powerful buyers have
a significant impact on prices
4. Bargaining power of suppliers: It highlights powerful suppliers
can demand premium prices and limit your profit
5. Barriers to entry: it includes threats of new entrants that can act
as a deterrent against new competitors

14. Industry intelligence
• An industry intelligence is a business tool carried out to assess profit
potential and the complexity of a particular industry.
• Industry intelligence is assessed based of key factors relating to the industry
such as the history of the industry,
• analysis of the industries financial performance,
• industry life cycle,
• a review of how differing trends such as seasonal fluctuations affect the
industry,
• external influences on the industry such as government laws and
• a review of levels of competition both present and future for the specific
industry.

15. Porter’s Five Forces- Industry
Analysis:
1. Industry rivalry: Indicates degree of competition among existing
firms, cut throat competition leads to reduced profit potential
for companies in the same industry
2. Threat of substitutes: Availability of substitute products or
services will limit a firm’s ability to raise prices
3. Bargaining power of buyers: It represents powerful buyers have
a significant impact on prices
4. Bargaining power of suppliers: It highlights powerful suppliers
can demand premium prices and limit your profit
5. Barriers to entry: it includes threats of new entrants that can act
as a deterrent against new competitors

16. Competitors’ intelligence
• Competitors’ intelligence in international business is an assessment of the
strengths and weaknesses of current and potential competitors.
• It involves primarily two activities:
1. obtaining information about important competitors and
2. using that information to predict competitor behavior.
Identifying
competitors
Competitors
Analysis
Profiling
Competitors
Comparison
of your
potentials with
competitors
Developing
Marketing
Strategy
Most firms face four basic types of Competition:
1. Brand competitors, refers to competition with different
brands offering with similar features, prices and benefits to the
same potential customers.
2. Product competitors, offer same product class but with offer
different benefits, features, and prices.
3. Generic competitors, are rival firms offering products which
are different but are capable of satisfying the same basic want
or provide the same benefit or utility to the prospective
customer.
4. Total budget competitors, primarily focus on prices, they
compete for the limited financial resources of the same
customers.

17. Various types of competition
Product Need
Brand
Competitors
Product
Competitors
Generic
Competitors
Total Budget
Competitors
Colleges Education
St. Joseph’s, Christ,
Jain, Jyoti Nivas,
Mount’s, Kristu
Jayanti
Distance
Education,
Community
college.
Books, Internet,
Apprenticeship,
Seminars.
Public Colleges
Movies Entertainment
Avengers,
Spiderman, Ice age,
Shrek, Batman,
Immortals, Mission
Impossible.
Cable TV, Pay-per-view
on DTH, DVD
rentals
Sporting events
like IPL, Music
Concerts,
Exhibitions,
Melas.
Relative and
friends house,
reading, Parks,
Museum.
Soft Drinks Refreshment
Coca-Cola, Pepsi,
Tropicana, Frooti
Minute Maid, Appy
Tea, Coffee,
Badam Milk, Fruit
Juice, Lime soda,
Butter milk.
Tap water,
Prasadam
(given in
religious places)
Candy, Pani puri,
Pop corn, Vada
pav, Pakoda.
Sedans
(Large
Cars)
Transportation
Maruti Suzuki, Ford
Hyundai, Toyota
Honda, Nissan
Jeeps,
Hatchbacks, SUVs,
Minivans, MUVs
Rental cars,
Bikes, BMTC,
Metro.
car-sharing, ride-sharing,
lift-sharing

18. Profitability
A.(a) Gross profit Margin
(b) Net profit Margin
(c) Earning power
(d) Return on equity
(e) Earning per share
(f) Cash EPS
B. Financial Statement Analysis
 Trading, P& L A/C Analysis
 Balance Sheet Analysis
C. Ratio Analysis
 Liquidity Ratios
 Leverage Ratios
 Profitability Ratios
 Activity / Efficiency Ratio

19. Outcome of FUNDAMENTAL ANALYSIS
 The end goal of performing fundamental analysis is to produce a
value that an investor can compare with the underlying assets current
price in hopes of figuring out what sort of position to take with that
security(under priced = buy, overpriced = sell).
 Valuation of Stock
 The intrinsic value of a share is the present value of all future cash flows
INTRINSIC VALUE = DIVIDENDS + CAPITAL APPRECIATION
Investment decision:
1. If the market price of a share is currently lower than its intrinsic value,
such a share would be bought because it is perceived to be under-priced.
2. A share whose current market price is higher than its intrinsic value
would be considered as overpriced and hence sold.

20. PRICE –QUALITY MATRIX
LQ
HP
HQ
HP
LQ
LP
HQ
LP
MQ
MP
PRICE
QUALITY
YESTERDAY’S
BLUE CHIPS
EMERGING
BLUE CHIPS
TURN AROUND
STOCK
NON
BLUE CHIPS
EVERGREEN
STOCK
A blue-chip: Stock of a large, well-established and
financially sound company that has operated for
many years.

21. 1 The non-blue chips PRICE –QUALITY MATRIX
a. Feature:
These shares are of low quality and hence are quoted at low
prices.
b. Should we buy:
Just ignore them until there is an upswing in their fortunes.
c. But Why?
You should not buy something simply because it is cheap.
Remember, what appears cheap may ultimately prove very
expensive.
2 Emerging blue chips
a. Feature:
High – Quality, High - Price (HQHP)
b. Should we buy:
Hold on to them.
c. But Why?
They are current stars, popular and command a high price.
As long as their glamour last, such shares perform well in the
market.
But be careful, partial booking of profits at high price may be
desirable.

22. 3 Yesterdays blue chips PRICE –QUALITY MATRIX
a. Feature:
Low – Quality, High - Price (LQHP). You can call these the stocks
with the hangover effect
b. Should we buy:
Such scrip's should be sold fast. Do not look at such a share
again until the company returns to the growth track.
c. But Why?
You can call these the stocks with the hangover effect‘. Once
they had the market on a high but they are more or less banking
on their past glory now. Once this fact is recognized, the market
downgrades such stocks and their prices tumble.
4 Emerging blue chips
a. Feature:
Medium – Quality, Medium - Price (MQMP): These are steady scrip's.
b. Should we buy:
Don‘t be in a hurry to sell them.
c. But Why?
They can last for two to three generations fairly intact. Hold on to
them.

23. TECHNICAL
ANALYSIS
What to Expect?
a. Introduction to Technical Analysis
b. 3 Hours is too less a time to expect anything w.r.t Technical Analysis,
there’s too much out there
c. Expect just an introduction to what is technical analysis
d. Get yourself convinced by end of the presentation that technical analysis
is good enough to buy and sell stocks.

24. Introduction
• Should I take a long position? Should I take a short
position? What is going to be the price tomorrow,
next week or next year?
• Technical analysis is the attempt to forecast stock prices on the basis
of market-derived data.
• Technicians (also known as quantitative analysts or chartists) usually
look at price, volume and psychological indicators over time.
• What wiki says?
• Technical analysis is a security analysis discipline for forecasting the future
direction of prices through the study of past market data, primarily price and
volume.
• John J. Murphy:
• TA is the study of market action, primarily through the use of charts, for the
purpose of forecasting future price trends.
• Bottom Line:
• Technical analysis is a method to predict the future behaviour of securities, with the
use of past data.

25. How to do Technical Analysis?
TECHNICAL
ANALYSIS
Fundamental
Analysis
Industry
Analysis
Company
Analysis
Economic
Analysis
Theories
Charting
Moving
Averages

26. Trend
time horizons that vary greatly
Stock Price trend of Jet Airways
Do charts
Speak?

27. Do charts Speak?
• Consider the basic assumptions presented by Robert D. Edwards and John
Magee in the classic book, Technical Analysis of Stock Trends:
• Stock prices are determined solely by the interaction of demand and supply.
• Stock prices tend to move in trends.
• Shifts in demand and supply cause reversals in trends.
• Shifts in demand and supply can be detected in charts.
• Chart patterns tend to repeat themselves.
Stock Price trend of Jet Airways
Technical analysis is based on one major assumption—trend. Markets trend.
 Traders and investors hope to buy a security at the beginning of an uptrend at a low
price, ride the trend, and sell the security when the trend ends at a high price.
 Although this strategy sounds very simple, implementing it is exceedingly complex.

28. Different Kind of Charts used:
1. Line charts
2. Bar charts
3. Candlesticks
Charting the Market
• Chartists use bar charts, candlestick, or point
and figure charts to look for patterns which
may indicate future price movements.
• They also analyze volume and other
psychological indicators (breadth, % of bulls vs
% of bears, put/call ratio, etc.).
• Strict chartists don’t care about fundamentals
at all.

29. Candlesticks
Drawing Bar (OHLC) Charts
 A candlestick chart is a style of bar-chart used primarily to describe price
movements of a security, derivative, or currency for a designated span of
time.
 It is a combination of a line-chart and a bar-chart, in that each bar
represents the range of price movement over a given time interval.
 A chart that displays the high, low, opening and closing prices for a
• Each bar is composed
of 4 elements:
• Open
• High
• Low
• Close
Open
Close
High
Low
Standard
Bar Chart
Japanese
Candlestick
Open
Close
High
Low
Standard
Bar Chart
Japanese
Candlestick
security for a single day.

30. The wide part of the candlestick is
called the "real body" and tells
investors whether the closing price was
higher or lower than the opening price
(black/red if the stock closed lower,
white/green if the stock closed higher).

33. Line Chart
• A style of chart that is created by connecting a series of data points
together with a line.
• This is the most basic type of chart used in finance and it is generally
created by connecting a series of past prices together with a line.
• A line chart can give the reader a fairly good idea of where the
price of an asset has traveled over a given time frame.
Infosys

34. Head and Shoulders
This formation is characterized by two small peaks on either side of a
larger peak.
H&S Top
Head
H&S Bottom
Head
Left Shoulder
Left Shoulder
Right Shoulder
Right Shoulder
Neckline
Neckline
head-and-shoulders chart pattern
1. Rises to a peak and subsequently declines.
Then, the price rises above the former peak
and again declines.
2. And finally, rises again, but not to the
second peak, and declines once more.
3. The first and third peaks are shoulders, and
the second peak forms the head
Inverse Head-and-Shoulders
This is a reversal pattern, meaning that it
signifies a change in the trend.
Formation of the pattern:
1. Left shoulder: Price declines and
moves higher.
2. Head: another Decline occurs to a
lower level.
3. Right shoulder: Price then moves
higher and moves back lower, but
not as low as the head
In this pattern, the neckline is a
level of support or resistance.

35. How to Trade the Pattern?
It is very important that traders wait for the pattern to complete.
• In the head and shoulders we are waiting for price action to move
lower than the neckline after the peak of the right shoulder.
• For the inverse head and shoulder, we wait for price movement
above the neckline after the right shoulder is formed.
S
S
H
Support
Level
Sell Signal

36. Double Bottom Example
Buy Signal
support
Level

37. Double Tops and Bottoms
• These formations are similar to
the H&S formations, but there
is no head.
• These are reversal patterns
with the same measuring
implications as the H&S.
Double Top
Target
Target
Double Bottom

39. Trends
 The meaning of trend in finance isn't all that different from the
general definition of the term - a trend is really nothing more
than the general direction.
 A trend represents a consistent change in prices (i.e. a
change in investor’s expectations)
 A trendline is a simple charting technique that adds a line to a
chart to represent the trend in the market or a stock.

40. Types of Trend
 Uptrends

41. Types of Trend
 Downtrend

42. Types of Trend
 Sideways Trend

43. Support and Resistance
 Support level is a price level where the price
tends to find support as it is going down

44. Support and Resistance
 Resistance Level is a price level where the price
tends to find resistance as it is going up

45. Importance of Support and Resistance
 Support and resistance analysis is an important part
of trends because it can be used to make trading
decisions and identify when a trend is reversing.

46. Aware: Support and Resistance levels
 Support and Resistance levels are
highly volatile
 Traders should not buy and sell directly
at these points as there may be
breakout also
A support is plotted at the daily low price
and resistance at the daily high price.

47. Breakout
 The penetration of support and
resistance level is called breakout

48. Trader’s Remorse
 Returning to the level of support or resistance
after a breakout is called trader’s remorse.

49. Resistance <-> Support

50. Moving Averages
• A simple moving average is formed by computing the average
(mean) price of a security over a specified number of periods.
• While it is possible to create moving averages from the Open, the
High, and the Low data points, most moving averages are created
using the closing price.
• For example: a 5-day simple moving average is calculated by
adding the closing prices for the last 5 days and dividing the total by
5.
Continuing our example, if the next closing price in the average is 15,
then this new period would be added
and the oldest day, which is 11, would
be dropped.

51. Moving Averages
An indicator is anything that can be used to predict future financial
or economic trends.
• Leading (Bullish)-Above average
• Leading - These types of indicators signal future events.
• Lagging (Bearish)-Below Average
• A lagging indicator is one that follows an event.
1. Relative Strength Index (RSI)
2. Moving average convergence divergence (MACD)
3. Fibonacci Retracement

52. 1. Note that all moving averages are
lagging indicators and will always be
"behind" the price.
2. When prices are trending, moving
averages work well.
3. However, when prices are not trending,
moving averages can give misleading
signals.

53. Moving Averages

54. DOW THEORY
Bhavishyavaani of Stocks

55. Introduction
and
Historical
Perspective
• How Dow Theory was made?
• 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.
• What is Dow theory?
• These editorials reflected Dow’s beliefs on how the
stock market behaved and how the market could be
used to measure the health of the business
environment.
• Who made Dow theory?
• 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.
• Some of the most important contributions to Dow
theory were William P. Hamilton's "The Stock Market
Barometer" (1922), Robert Rhea's "The Dow Theory"
(1932), E. George Schaefer's "How I Helped More Than
10,000 Investors To Profit In Stocks" (1960) and Richard
Russell's
The Dow theory on
stock price
movement is a form
of technical analysis
that includes some
aspects of sector
rotation.

56. Dow
Theory
• Dow first used his theory to create the Dow Jones
Industrial Index and the Dow Jones Rail Index (now
Transportation Index), which were originally
compiled by Dow for The Wall Street Journal.
• Dow created these indexes because he felt they
were an accurate reflection of the business
conditions within the economy because they
covered two major economic segments: industrial
and rail (transportation).
• While these indexes have changed over the last 100
years, the theory still applies to current market
indexes.
Dow himself never
used the term Dow
theory nor
presented it as a
trading system.
1. Dow believed that the stock market as a whole was a
reliable measure of overall business conditions within the
economy.
2. By analyzing the overall market, one could accurately
gauge those conditions and identify the direction of
major market trends and the likely direction of individual
stocks.

57. Six basic tenets of Dow theory
1. The market has three movements
2. Market trends have three phases
3. The stock market discounts all news
4. Stock market averages must confirm each other
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended

58. 1. The market has three movements
• Primary Trend
Dow theory identifies three trends within the market:
primary, secondary and minor.
• The "main movement", primary movement or major trend may last from
less than a year to several years. It can be bullish or bearish.
• Secondary Trend
• The intermediate trends are corrective movements, which may last for
three weeks to three months. The primary trend may be interrupted by
the intermediate trend.
• Minor Trend
• The short term trend refers to the day to day price movement.
 Most proponents of Dow theory focus their attention on the
primary and secondary trends, as minor trends tend to include a
considerable amount of noise.
 If too much focus is placed on minor trends, it can to lead to
irrational trading, as traders get distracted by short-term volatility
and lose sight of the bigger picture.

59. 1. The market has three movements
Tata Motors - 2 years
Tata Motors – 5 years
Tata Motors – 1 years
Primary Trend
The "main
movement",
primary
movement or
major trend
may last from
less than a
year to
several years.
It can be
bullish or
bearish.

60. Kingfisher Airlines– 5 years
Kingfisher Airlines- 2 years
Kingfisher Airlines– 1 years

61. He postulated three types of price
movements over time:
• (1) major trends that are like tides in the ocean,
• (2) intermediate trends that resemble waves, and
• (3) short-run movements that are like ripples.

62. 2. Market trends have three phases
Dow theory asserts that major market trends are composed of
three phases:
• Primary Upward Trend (Bull Market)
• The first stage of a bull market is referred to as the accumulation phase, which
is the start of the upward trend. This is also considered the point at which
informed investors start to enter the market.
• The accumulation phase typically comes at the end of a downtrend, when
everything is seemingly at its worst.
• But this is also the time when the price of the market is at its most attractive
level because by this point most of the bad news is priced into the market,
thereby limiting downside risk and offering attractive valuations.
• However, the accumulation phase can be the most difficult one to spot
because it comes at the end of a downward move, which could be nothing
more than a secondary move in a primary downward trend - instead of being
the start of a new uptrend.
The first phase is the accumulation phase, where the asset quietly goes
up without too much attention being paid by the general public, and
few people participate. This is the “dirt cheap” phase of gold when
only true believers assumed positions

63. Uptrend Lower Peaks ---Buy--Up Tread
Primary Upward Trend (Bull Market)

64. 2. Market trends have three phases
Dow theory asserts that major market trends are composed of
three phases:
• Primary Downward Trend (Bear Market)
• The second phase is the awareness phase, where seasoned
professionals and a few more sophisticated funds take their
positions.
• The general public begins to take notice and some people
participate, driving prices higher at a little faster pace.
• This is also a more volatile phase, where we could see more
substantial daily price swings.
• It is in the second phase where we see the most painful
secondary corrections (Where we currently are).
• This phase will also be characterized by persistent market
pessimism, with many investors thinking things will only get
worse.

65. Uptrend Higher Peaks---Sell--Down trend
Primary Downward Trend (Bear Market)

66. The Panic Phase
• Every major primary bull market ends up with a
wildly speculative third phase, which is the panic
phase, where the public and crowd rush head-long
into the market, driving prices up
exponentially
• In the panic phase, the market is wrought up with
negative sentiment, including weak outlooks on
companies, the economy and the overall
market.

67. 3. The stock market discounts all
news
• Stock price represents sum of all hopes, greed, fears and expectations of
all the traders and investors and stock price discounts all information’s.
• What Information’s Stock Market Discount’s?
• Stock Market quickly reflects information’s in it’s price, as soon as any
information or news is available about stock, market will discount all such
information weather it’s related to past, present and also for the future
therefore, it becomes easy to analyze future price movements on the basis of
technical analysis.
• So, the person who is following technical analysis for them Dow theory states
that stock market discounts all information in stock prices so one doesn’t need
to follow other news and information’s like rate of interests, company
announcements and all such information will be reflected in price so all you
have to keep an eye on is the stock price movements.

68. 3. The stock market discounts
all news
• What Stock Market Doesn’t Discount’s?
• Stock Market doesn’t discounts natural calamities like Tsunami,
Earthquakes etc. All such information doesn’t discounts stock market
prices.

69. 4. Stock market averages must
confirm each other
• Under Dow theory, a major reversal from a bull to a bear
market (or vice versa) cannot be signaled unless both
indexes (traditionally the Dow Industrial and Rail Averages)
are in agreement.

70. 5. Trends are confirmed by
volume
• Dow believed that volume confirmed price trends.
• When prices move on low volume, there could be many different
explanations.
• But when price movements are accompanied by high volume, Dow
believed this represented the "true" market view.
• If many participants are active in a particular security, and the price
moves significantly in one direction, Dow maintained that this was
the direction in which the market anticipated continued movement.
To him, it was a signal that a trend is developing.

71. 6. Trends exist until definitive signals
prove that they have ended
• It relates a physical law to market movement, which states that an
object in motion (in this case a trend) tends to continue in motion until
some external forces causes it to change direction.
• Dow was a firm believer that market remains in a trend. It may
deviate for a while because of noise but it will return as soon as its
effect is over.
• There are many trend reversal signals like support/resistances, price
patterns, trend lines, moving averages. Some indicators can also
provide warnings of loss of momentum.

72. Summary
1. The market has three movements
2. Market trends have three phases
3. The stock market discounts all news
4. Stock market averages must confirm each other
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended
The Dow Theory is a market timing
strategy based upon technical
analysis.

73. EFFICIENT MARKET
HYPOTHESIS
The Collective Wisdom

74. Concept
• A market theory that evolved from a 1960's Ph.D. dissertation by
Eugene Fama.
• The general concept of the efficient markets hypothesis is that
financial markets are "informationally efficient"-
• In other words, that asset prices in financial markets reflect all
relevant information about an asset.
• In consequence of this, one cannot consistently achieve returns in
excess of average market returns on a risk-adjusted basis, given
the information available at the time the investment is made.

75. Forms of Market Efficiency
The Weak form of EMH
 weak-form efficiency), postulates that future stock prices cannot be
predicted from historical information about prices and returns.
 In other words, the weak form of the efficient markets hypothesis
suggests that asset prices follow a random walk and that any
information that could be used to predict future prices is independent
of past prices.
• The Weak form of EMH
There are three major versions of the hypothesis:
"weak", "semi-strong", and "strong".
• In an weak market efficiency, fundamental analysis can help you predict prices.
How?
• Fundamental analysis is based on public information about a company (reported
earing, profit, assets etc.)
• Since even updated public information is not spread freely and easily, some
people know that information, but not all people.
• The "knowledge" public with this information can use it to do fundamental analysis
to help them predict share price and beat the people who don't know it.
• But technical analysis is still not effective, because it's based on past share prices.
(We assume all people know past prices)

76. Hero Honda split, little short-term
impact, more long-term negatives
The news of the split drove the stock price down to Rs1,560 on 15th
December from a high of Rs2,062 on 30th November—a 24% fall in a
fortnight.

77. Forms of Market Efficiency
The Strong form of EMH
 All relevant information flows instantly and super quickly.
 At any one time, anyone and everyone already knows all relevant
information about a share/stock.
 No body can earn money by using any information to "analyze" and
predict future share price movements (up or down).
• The Weak form of EMH
There are three major versions of the hypothesis:
"weak", "semi-strong", and "strong".
• The strong form of EMH assumes that current stock prices fully reflect all public
and private information.
• It contends that market, non-market and inside information is all factored into
security prices and that no one has monopolistic access to relevant
information.
• It assumes a perfect market and concludes that excess returns are impossible
to achieve consistently.

78. Insider trading in Ranbaxy?
• Apr 10, 2014,
• Over six trading days, prior to the announcement of its acquisition
by Sun Pharma on Monday, Ranbaxy shares rallied 34%. Could it
be a case of insider trading?
• On 7th April, Ranbaxy Laboratories Ltd (Ranbaxy) announced
about its acquisition by Sun Pharmaceutical Industries Ltd (Sun
Pharma) in $4 billion deal. Because of this announcement,
Ranbaxy share price opened 10% up and made its 52-week high
at Rs. 505 on BSE before it ended lower. But why was there a
sudden rise in volumes and prices over six trading days, prior to
this takeover?

80. Forms of Market Efficiency
There are three major versions of the hypothesis:
"weak", "semi-strong", and "strong".
The Semi-Strong form of EMH
 What if a market in a certain country has something in between "Strong"
and "weak" Market efficiency?
 We usually call it "Semi-strong" market efficiency.
 Information moves and flows semi-quickly (but not too quickly, not as in
case of "strong" market efficiency)
 So company officers/insiders/relatives/friends know information slightly
in advance of the public and have slight advantage over normal
investors like you and me.
 Inside information may give advantage, but public information is
useless.
 Fundamental and technical analysis is of no use