Technical Analysis – Taking a Holistic Approach

Contributed by: Abhishek Shah

IAIP organised a speaker event in Kolkatta on February 21st in order to gather insights about the art of Technical Analysis. Gautam Shah, Associate Director & Technical Analyst at JM Financial Services, delighted the audience with a lucid presentation explaining how budding analysts could maximise their chances of success at reading the market behaviour accurately.

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He suggested the use of a seven-point checklist of technical indicators, and advised taking a position only if at least six of these indicators confirmed a particular price action.

  • Dow Theory
  • Price Patterns
  • Moving Averages
  • Technical Indicators
  • Trendlines and Retracement Studies
  • Candlestick Patterns
  • Elliot Set-up and Seasonal Tendency

According to Gautam, Dow Theory is an extremely reliable tool and has 90-95% accuracy levels. Price patterns come in various forms, e.g. Wedge, and can be important indicators of breakout- a trend change or reversal. Analysts need to be careful with Moving Averages (MA) as each chart works best with its own MA. For e.g. 30 day MA might be more useful in case of Reliance Industries than say Infosys in which case 15 day MA might give more accurate readings. Gautam also mentioned two particular technical indicators- RSI and DM-ADX. RSI is a robust tool and a reliable scale for measuring momentum, with accuracy levels as high as 80% if used correctly. Gautam also gave an example of how these indicators are interpreted. For e.g. if ADX comes to 20, one can expect a new move to start in the charts. The important thing is that indicators like RSI must complement trend analysis. So, for e.g., when trendlines break, a good analyst will find conviction only if there is significant momentum backing the price movement.

He also touched upon candlestick charts and Elliot Wave set-ups. Candlestick charts were extensively used by the Japanese before the western world realised their beauty and use. Gautam strongly recommended the audience to dig deeper into the last two indicators as they require an advanced level of study. In the final leg of the presentation, Gautam dazzled the audience by using his charts to demonstrate some seasonal trends which keep repeating. For e.g. the month of October has historically seen the market falling more often than not. The CNX Nifty has traditionally been rather volatile in the month of May. On the other hand, markets tend to make a top in the month of January, and fall thereafter.

He also claimed that charts have a way of forewarning an avid reader, even before an important event has panned out. He gave the example of September 11, when the twin towers came under terrorist attacks and the US markets witnessed a sell-off. According to Gautam, the charts had already given warning signals. Similarly they tend to continue to provide indication before important events like RBI meet, Inflation data release, etc. Apparently, there are always insiders who begin to take positions and depending on the strength of their positions, the signals are sometimes explicit while being unconvincing at other times.

Gautam concluded the presentation with some interesting facts surrounding election times. Since 1989, there have been seven General Elections in India.

  1. Out of a total seven election years, six have ended generating positive returns.
  2. Three years gave positive returns in excess of 60% while two years gave a return in excess of 13%.
  3. Only one year ended generating a negative return of 16%.
  4. Based on historical analysis it can be said that “pre election rally” is more of a myth and has rarely played out.
  5. The cautious stance that market participants generally take before such a highly unpredictable political event has not worked in favor of investors.

Final tips from Gautam included:

  • Technical analysis is all about discipline. Money management plays a huge role in determining whether one is successful or not.
  • He expects the markets to start a large trending move anytime in the next 8 weeks. The 5 year long consolidation could finally be ending.
  • The current market scenario is ideal for SIP investment that could generate super normal returns in the next few years.

Needless to say, these insights provided enough fodder to keep the audience engaged and excited till well after the speaker had left.

About IAIP

India Association of Investment Professionals (IAIP), which is established April 2005 and located in Mumbai, is an association of local investment professionals. As one of the 136 CFA Institute member societies, IAIP connects members to a global network of investment professionals. Consisting of portfolio managers, security analysts, investment advisors, and other financial professionals, IAIP promotes ethical and professional standards within the investment industry, facilitates the exchange of information and opinions among people within the local investment community and beyond, and works to further the public’s understanding of the CFA designation and investment industry.
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