Portfolio Construction Using Technical and Fundamental Analysis Essay

CHAPTER ONE INTRODUCTION1.1 Background of the OrganizationSmart Equity Brokers Pvt. Ltd. & Smart practised Brokers Pvt. Ltd. was effected on 1st May 2006 as Smart Equity Brokers Pvt. Ltd., by a unsalted Chartered Accountant, Mr. Arun Khera, permited by Mr. Ravi Raj Jain, both having a rich experience & exposure to capital, derivative & goodness grocery. The Comp both acquired the membership of Bombay Stock Exchange BSE in 2006 shell Stock Exchange NSE in 2006 National Commodity & Derivative Exchange NCDEX in 2003 Multi Commodity Exchange MCX in 2006 Derivatives Segment NSE, Clearing sh ar in 2006 Smart is a full service brokerage ho function providing comprehensive consultatory work to its clients under one roof, enabling you to manage altogether your fiscal involve. We have expertise in advisory services in both cash and derivatives sides of the capital markets.Smart also provides commodity profession through with(p) its group subsidiaries, and is a member of th e MCX and NCDEX. The services argon offered under total confidentiality and integrity with the sole mean of maximizing returns to our customer tush is a mix of institutional, noble net worth, and retail redactors. This diversified base of customers, together with our wide gamut of services, provides us with the necessary st great power and strength to weather the volatility much(prenominal) wear than that of the competitors and also maintain mettlesome standards of customer service takes throughout. Smart pull togethers the support needs of this investor base through execution skills driven by an experient sales team and research-backed advice generated by a team of experienced analysts. Smart advisory services range from investing, trans moveion, research, monetary planning and portfolio management, which ar offered, to a heavy(p) scrap of high net worth individuals and corporate. Mission- To provide research-driven, unbiased investment advise with the objective of achieving sustain subject superior investment returns for our clients. To provide flaw slight execution support to meet diverse client needs on a plat condition of professionalism and integrity.Our Values To be fair, empathetic and responsive in serving our customers.To extol and reinforce our fellow employees and the power of teamwork. To strive relentlessly to remedy what we do and how we do it. To al focal points shit and be worthy of our customers trust.21.2 Introduction of the StudyThis project is being done to construct portfolio of clients with the patron of brothamental and technical analysis. Also analyse their portfolio by valuating those companies where they have already invested exploitation specific valuation model. Then find out whether it is proper(a) judgment of conviction to invest in those companies apply technical analysis. Also calculating the returns they be acquire and show for high(prenominal) return. fundamental abridgment perishs us the id ea what to buy or what to sell, while practiced Analysis tells us the timing when to buy or when to sell. In this project I am mainly focusing on how to provide a holistic view to the clients, specifically HNIs (High Net-worth Individuals), on investing in beauteousness market i.e. blood cable system market. The main motivating of this research is to check whether fundamental analysis and technical analysis together is useful to provide wear out suggestion for investments.1.3 Learning Objectives of the projectTheprojectunderinterpretedduringthe finishofinternshipwasPortfolioConstructionusingFundamentaland technicalAnalysis.Thelearningobjectivesoftheinternship arasfollows- UnderstandingthevariousactivitiesinaBrokingFirm Toget informwiththeallworkingsofonlinetrading Togainpracticalknowledgeinsh atomic number 18tradingTo try outthefinancialmarket&sh armovementsinordertostudyofprospectsofinvestinginaparticular stemma. To go throughtheworkinginthederivativesmarket.1.4 Need of the Pr ojectPortfolio Construction is all about investing in a range of funds that work together to create an investment solution for investors. Building a portfolio involves ground the way various types of investments work, and combining them to address your personal investment objectives and factors such as attitude to take chances the investment and the expect life of the investment. When building an investment portfolio there be deuce actually alpha conside rations. The first is asset al hole, which is concerned with how an investment is spread across different asset types and regions. The mho is fund filling, which is concerned with the choiceof fund managers and funds to fall in still for for each one of the chosen asset classes and sectors. both of these considerations be of the essence(predicate), although academic studies have consistently sh avow that in the medium to coherent term, asset allocation usually has a much larger impact on the variability of a portfoli os return. To help in choosing a3suitable asset allocation we have created a Risk Profiler that helps identify your attitude to stake and therefore interrupt identify a combination of investments to build a portfolio. With such a spacious offspring of investment funds to choose from, spanning the full range of asset classes and world markets it is easy to find confused when choosing which investments to imprint. It is withal more difficult to choose the right combination of investment to potentially meet your investment goals. The tool, which we use so as to build the portfolio, is technical and fundamental analysis.1.5 Scope of Project bound and limitationThe study get out help the organization to know the present condition of the portfolio construction and expectations of the clients towards portfolio The takeness of the clients and to machine portfolio system which is effective for the clients Limitations of the Study This project is being done with the help of histo rical data bid annual disciplines of the smart set. So, the availability of data is the limitation of this project. Also this project needs a lot of time to analyzing data. As the project is based on secondary data, possibility of unauthorized tuition rear end non be avoided. The report is basically is made amidst the horizon of three months and the situation of market is very dynamic so the stopping point or the return might non reflect the true learn.4CHAPTER TWO methodology2.1 Research DesignThe methodologies used for portfolio construction argon technical and fundamental analysis. While constructing the portfolio it was kept in mind that it was basically built for investing purpose.2.2 Data Collection method and instrumentsAll the data, graph and maps atomic number 18 collected from secondary sources. The instruments used are iChart Java application to construct charts and graphs.2.3 Analysis Techniques and ProcedureFundamental analysis is the foundation of solid i nvesting. It helps you determine the underlying health of a company by examining the line of descent core numbers its income statements, its earnings releases, its symmetry sheet, and former(a) indi mountaints of economic health. From these fundamental principle investors evaluate if a seam is under- or over quantifyd. Fundamental analysis begins with an individual stock, but it also extends to that companys larger context. It explores questions standardized these Is the company competitive at heart its industry? Is that industry growing or shrinking, correspondd to early(a) sectors? dispenses of companies with sozzled fundamentals will tend to go up over time, while fundamentally weak companies will check up on their stock impairments fall. This makes fundamental analysis especially valuable to desire-term investors. Fundamental analysis is one indoctrinate of investing research. It contrasts with a nonher popular approach, technical analysis, which focuses not on l ine of business fundamentals but on stock- damage action as reflected in charts. practiced analysts look for recognizable approach var.s in determine charts that will help them estimate the stocks future damage movement. Fundamental analysis helps you determine if a company is a good or poor investment choice. Imagine youre a venture capitalist or a bank, who must decide if that company is worthy of a loan or impartiality investment.How set up you evaluatewhether this particular company de replys your investable capital? Fundamental analysts consider the side by side(p) in do their decision to invest (or not) Is the company making a profit consistently? (While this is naturally the most in-chief(postnominal) question for investors, its principal(prenominal) to consider the answer in a bigger context. A unity profitable quarter for a new company might be a fluke. In the resembling regard, a drop in profitability for an established blue- assay company might save be a t emporary setback.) Is that profit growing or declining over time? Is the company bemuseing its own relative to the competition? Is it a leader in its sector? Is that sector growing or declining in importance to the overall economy? Can the company pay its bills adequately? If you were to dismantle the companys operations to mean solar twenty-four hour period, what would be the intrinsic value of its assets versus the value of its debts?Fundamental Analysis Tools Earnings per Share EPS impairment to Earnings Ratio P/E Projected Earning Growth PEG Price to Sales P/S Price to Book P/B Dividend Payout Ratio Dividend Yield Book Value egest on Equity Earnings per Share EPS The portion of a companys profit allocated to each outstanding share of common stock. Earnings per share serves as an power of a companys profitability. Calculated as5When calculating, it is more accurate to use a weighted honest number of shares outstanding over the reporting term, because the nu mber of shares outstanding derriere change over time. However, data sources some quantify simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number. Price to Earnings Ratio P/E Price/Earnings or P/E ratio is the ratio of a companys share expenditure to its earnings per share. It tells whether the share bell of a company is fairly valued, undervalued or overvalued. Formula P/E Ratio = good Share Price Earnings per ShareCurrent share terms is obtained from secondary markets like BSE, NSE, etc. while EPS is work out as (net income minus pet dividends)/weighted average number of shares outstanding. Leading and Trailing P/E Ratio If the EPS is the figure for the sure period the P/E ratio is called trailing P/E ratio. For better analysis the EPS should be the one expected to prevail in the next reporting period, say next year. P/E ratio calculated based on expected P/E ratio is called leading P/E and is a more meaning(prenominal) estimate of the companys justified P/E ratio. Analysis If the justified P/E calculated using dividend discount analysis is higher than the flowing P/E ratio the share is undervalued and should be purchased. If the justified P/E is set out than P/E ratio the share is overvalued and should be sold.Projected Earning Growth PEG6A stocks value to earnings ratio divided up by the growth rate of its earnings for a specified time period. The price/earnings to growth (PEG) ratio is used to determine a stocks value while taking the companys earnings growth into account, and is considered to provide a more complete picture than the P/E ratio. While a high P/E ratio exsanguinethorn make a stock look like a good buy, cipher in the companys growth rate to get the stocks PEG ratio throw out tell a different story. The inflict the PEG ratio, the more the stock may be unde rvalued given its earnings performance. The calculation is as follows (P/E ratio)/Annual EPS Growth Price to Sales P/S Investors are always seeking ways to compare the value of stocks. The price-to-sales ratio(Price/Sales or P/S) provides a simple approach take the companys market capitalization (the number of shares figure by the share price) and divide it by the companys total sales over the one-time(prenominal) 12 months. The lower the ratio, the more attractive the investment. As easy as it sounds, price-to-sales provides a useful esteem for sizing up stocks. But investors need to be mindful of the ratios potential pitfalls and affirmableunreliability.Dividend Payout Ratio Dividend payout ratio is the ratio of dividend per share divided by earnings per share. It is a beatnik of how much earnings a company is paying out to its shareholders as compared to how much it is retaining for reinvestment. Formula Dividend Payout Ratio = Dividend per Share Earnings per ShareDividend payout ratio stub also be calculated as total dividends divided by net income. Analysis A shareholder has two sources of return, namely periodic income in the form of dividends and capital appreciation. Dividend payout ratio tells what percentage of total earnings the company is paying back to shareholders. A florid dividend payout ratio leads to investor confidence in the company. Plowback ratio (also called retention rate) is equals 1 payout ratio and it equals the earnings retained divided by total earnings for the period.7Book Value 1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation. 2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities. 3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on. Also known as net book value (NBV). s ire on Equity Return on uprightness or return on capital is the ratio of net income of a business during a year to its stockholders equity during that year. It is a measure of profitability of stockholders investments. It shows net income as percentage of shareholder equity. Formula The formula to calculate return on equity is ROE = Annual Net Income add up Stockholders EquityNet income is the after tax income whereas average shareholders equity is calculated by dividing the sum of shareholders equity at the beginning and at the end of the year by 2. The net income figure is obtained from income statement and the shareholders equity is found on balance sheet. You will need year ending balance sheets of two square financial years to find average shareholders equity. Analysis Return on equity is an heavy measure of the profitability of a company. Higher values are generally favorable meaning that the company is economical in generating income on new investment. Investors should compare the ROE of different companies and also check the stylus in ROE over time. However, relying solely on ROE for investment decisions is not safe. It can be artificially influenced by the management, for example, when debt financing is used to digest share capital there will be an annex in ROE even if income remains constant.Technical Analysis can be defined as an art and science of forecasting future prices based on an examination of the past price movements. Technical analysis is not astrology for predicting prices. Technical analysis is based on analyzing current train-supply of commodities, stocks, indices, futures or any tradable instrument. Technical analysis involve putting stock in organisation like prices, passels and undefendable interest on a chart and applying various patterns and index fingers to it in order to assess the future price movements. The time ring in which technical analysis is applied may range from intra mean solar sidereal mean solar day lighttime (1-minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or periodic price data to many years. There are essentially two methods of analyzing investment opportunities in the protection market viz fundamental analysis and technical analysis. You can use fundamental in brass like financial and non-financial aspects of the company or technical information which misss fundamentals and focuses on actual price movements. The basis of Technical Analysis What makes Technical Analysis an effective tool to analyze price behavior is explained by following theories given by Charles Dow Price discounts everything Price movements are not totally random What is more important than why CANDLE CHARTS What is a chart? Charts are the working tools of technicalanalysts. They use charts to plot the price movements of a stock over specific time frames. Its a graphical method of show where stock prices have been in the past.8A chart gives us a complete picture of a stocks price history over a period of an hour, day, week, month or many years. It has an x-axis ( level) and a y-axis (vertical). Typically, the x-axis represents time the y-axis represents price. By plotting a stocks price over a period of time, we end up with a pictorial representation of any stocks trading history. A chart can also depict the history of the volume of trading in a stock. That is, a chart can illustrate the number of shares that change hands over a indisputable time period. Candlesticks Formation Candlestick charts provide visual insight to current market psychological science. A standard standard examine holder displays the open, high, low, and sloppeddown prices in a format similar to a modern-day bar-chart, but in a manner that extenuates the relationship between the enterprisingness and end prices. Candlesticks dont involve any calculations. for each one see holder represents one period (e.g., day) of data. The figure given on a lower floor displays the elements of a cadmium.9, A candle holder chart can be created using the data of high, low, open and closing prices for each time period that you want to display. The hollow or filled portion of the candlestick is called the carcass (also referred to as the real body). The long thin lines preceding(prenominal) and below the body represent the high/low range and are called behinds (also referred to as wicks and tails). The high is marked by the top of the upper berth shadow and the low by the so-and-so of the lower shadow. If the stock tauts higher than its openingprice, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock cozys lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.Each candlestick provides an easy-to-decipher picture of price acti on. Immediately a trader can see and compare the relationship between the open and reason as come up as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure. Thus, compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret.10Why candlestick charts? NIFTY (Daily) Candlestick Chart What does candlestick charting offer that typical Western high-low bar charts do not? Instead of vertical line having horizontal ticks to identify open and close, candlesticks represent two-dimensional bodies to depict open to close range and shadows to mark days high and low. For several years, the Japanese traders have been using candlestick charts to track market activity. eastern analy sts have identified a number of patterns to determine the continuation and switch of panache. These patterns are the basis for Japanese candlestick chart analysis. This places candlesticks rightly as a part of technical analysis. Japanese candlesticks offer a quick picture into the psychology of of a sudden term trading, studying the effect, not the cause.Applying candlesticks means that for short-term, an investor can make confident decisions about buying, selling, or holding an investment. Candlestick analysis wholeness cannot ignore that investors psychologically driven forces offear greed and hope greatly influence the stock prices. The overall market psychology can be tracked through candlestick analysis. More than just a method of pattern recognition, candlestick analysis shows the interaction between buyers and sellers. A fresh candlestick indicates opening price of the posing being below the closing price and a mordant candlestick shows opening price of the seance b eing preceding(prenominal) the closing price. The shadow at top and bottom indicates the high and low for the session.11Japanese candlesticks offer a quick picture into the psychology of short term trading, studying the effect, not the cause. Therefore if you combine candlestick analysis with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points. unity candle patterns In the terminology of Japanese candlesticks, one candle patterns are known as comprehensive lines. There are two types of umbrella lines the dangling man and the malleus. They have long lower shadows and elegant real bodies that are at top of the trading range for the session. They are the simplest lines because they do not necessarily have to be spotted in combination with other candles to have some validity. shaft and dangling military personnel Hammer Hanging Man Candlesticks Hammer Hammer is a one-candle pattern that occurs in a down thin when bulls make a mavent to step into the rally. It is so named because it hammers out the bottom.The lower shadow of hammer is tokenish of twice the length of body. Although, the colour of the body is not of much significance but a bloodless candle shows slightly more bullish implications than the scurrilousness body. A positive day i.e. a sporting candle is required the next day to confirm this indicate. Criteria The lower shadow should be at to the lowest degree(prenominal) two times the length of the body. There should be no upper shadow or a very secondary upper shadow. The real body is at the upper end of the trading range. The color of the body is not important although a egg washrag body should have slightly more bullish implications. The followingday needs to confirm the Hammer symptom with a strong bullish day. repoint enhancements 1. The long-acting the lower shadow, the higher the potential of a retrogression occurring. 2. Large volume on the Hammer day in creases the chances that a blow off day has occurred. 3. A gap down from the forward days close sets up for a stronger reversal move provided the day after the Hammer signal opens higher. mannikin psychology12The market has been in a down front, so there is an air of plunk forishness. The price opens and starts to trade lower. However the sell-off is abated and market returns to high for the day as the bulls have stepped in. They start bringing the price back up towards the top of the trading range. This creates a depleted body with a large lower shadow. This represents that the bears could not maintain crack. The long lower shadow now has the bears questioning whether the even out is still intact. chip would be a higher open with yet a still higher close on the next trading day. Hanging man The hanging man appears during an uptrend, and its real body can be either forbidding or white. While it signifies a potential top reversal, it requires confirmation during the next tradi ng session. The hanging man usually has little or no upper shadow. Soybean Oil-December, 1990, Daily (Hanging Man and Hammer)13Dow Jones Industrials-1990, Daily (Hanging Man and Hammer) shaft star andinverted hammer Other candles similar to the hanging man and hammer are the shooting star, and the inverted hammer. Both have small real bodies and can be either b lack or white but they both have long upper shadows, and have very little or no lower shadows. change Hammer Description Inverted hammer is one candle pattern with a shadow at least two times greater than the body. The small body identifies this pattern. They are found at the bottom of the declinewhich is deduction that bulls are stepping in but still selling is going on. The color of the small body is not important but the white body has more bullish attributes than a black body. A positive day is required the following day to confirm this signal.Signal enhancements 1. The longer the upper shadow, the higher the potentia l of a reversal occurring. 2. A gap down from the earlier days close sets up for a stronger reversal move.143. Large volume on the day of the inverted hammer signal increases the chances that a blow off day has occurred 4. The day after the inverted hammer signal opens higher. Pattern psychology After a downtrend has been in effect, the atmosphere is bearish. The price opens and starts to trade higher. The Bulls have stepped in, but they cannot maintain the strength. The existing sellers knock the price back down to the lower end of the trading range. The Bears are still in control. But the next day, the Bulls step in and take the price back up without major confrontation from the Bears. If the price maintains strong after the Inverted Hammer day, the signal is confirmed. sense experiences A small real body that gaps away from the large real body forward it is known as star. Its still a star as long as the small real body does not overlap the preceding real body. The color of t he star is not important. Stars can occur at tops or bottoms. Shooting star Description The Shooting Star is a single line pattern that indicates an end to the uptrend.It is substantially identified by the presence of a small body with a shadow at least two times greater than the body. It is found at the top of an uptrend. The Japanese named this pattern because it looks like a shooting star falling from the sky with the tail trailing it.Criteria 1. The upper shadow should be at least two times the length of the body. 2. Prices gap open after an uptrend.153. A small real body is formed near the lower part of the price range. The color of the body is not important although a black body should have slightly more bearish implications. 4. The lower shadow is virtually non-existent. 5. The following day needs to confirm the Shooting Star signal with a black candle or better yet, a gap down with a lower close. Signal enhancements 1. The longer the upper shadow, the higher the potential o f a reversal occurring. 2. A gap up from the previous(prenominal) days close sets up for a stronger reversal move provided. 3. The day after the Shooting Star signal opens lower. 4. Large volume on the Shooting Star day increases the chances that a blow-off day has occurred although it is not a necessity. Pattern psychology During an uptrend, the market gaps open and rallies to a new high. The price opens and trades higher. The bulls are in control. But sooner the close of the day, the bears step in and take the price back down to the lower end of the trading range, creating a small body for the day.25 This could indicate that the bulls still have control if analyzing a Western bar chart.16However, the long upper shadow represents that sellers had started stepping in at these levels. until now though the bulls may have been able to keep the price positive by the end of the day, the evidence of the selling was apparent. A lower open or a black candle the next day reinforces the fa ct that selling is going on.Two candles pattern bullish engulfing A bullish engulfing pattern consists of a large white real body that engulfs a small black real body during a downtrend. It signifies that the buyers are overwhelming the sellers EngulfingBullish engulfing Description The Engulfing pattern is a major reversal pattern comprised of two opposite colored bodies. This Bullish Pattern is formed after a downtrend. It is formed when a large17white candlestick that completely eclipses the previous day candlestick follows a small black candlestick. It opens lower that the previous days close and closes higher than the previous days open. Criteria 1. The candlestick body of the previous day is completely overshadowed by the next days candlestick. 2. Prices have been declining definitely, even if it has been in short term. 3. The color of the first candle is similar to that of the previous one and the body of the second candle is opposite in color to that first candle. The only e xception being an engulfed body which is a doji.Signal enhancements 1. A small body being covered by the larger one. The previous day shows the trend was running out of steam. The large body shows that the new statement has started with good force. 2. Large volume onthe engulfing day increases the chances that a blow off day has occurred. 3. The engulfing body engulfs absorbs the body and the shadows of the previous day the reversal has a greater probability of working. 4. The probability of a strong reversal increases as the open gaps between the previous and the current day increases. Pattern psychology After a decline has taken place, the price opens at a lower level than its previous day closing price. Before the close of the day, the buyers have taken over and have led to an increase in the price above the opening price of the previous day. The emotional psychology of the trend has now been altered. When investors are learning the stock market they should utilize information t hat has worked with high probability in the past.Bullish Engulfing signal if used after right(a) training and at proper locations, can lead to highly profitable trades and consistent results. This pattern allows an investor to improve their probabilities of been in a correct trade. The common sense elements conveyed in candlestick signals makes for a clear and curt trading technique for beginning investors as well as experienced traders. bearish engulfing A bearish engulfing pattern, on the other hand, occurs when the sellers are overwhelming the buyers. This pattern consists of a small white candlestick with short shadows or tails followed by a large black candlestick that eclipses or engulfs the small white one.Bearish Engulfing1819Piercing The bullish counterpart to the dark cloud cover is the penetrative pattern. The first thing to look for is to spot the piercing pattern in anexisting downtrend, which consists of a long black candlestick followed by a gap lower open during t he next session, but which closes at least halfway into the earlier black candlesticks real body. Description The Piercing Pattern is peaceful of a two-candle formation in a down trending market. With daily candles, the piercing pattern will often end a minor downtrend (a downtrend that lasts between six and fifteen trading days). The day before the piercing candle appears, the daily candle should have a fairly large dark real body, signifying a strong down day.Criteria 1. The downtrend has been translucent for a good period. 2. The body of the first candle is black the body of the second candle is white. 3. A long black candle occurs at the end of the trend. 4. The white candle closes more than halfway up the black candle. 5. The second day opens lower than the trading of the prior day. Signal enhancements 1. The reversal will be more pronounced, if the gap down the previous day close is more. 2. The longer the black candle and the white candle, the more forceful the reversal. 3 . The higher the white candle closes into the black candle, the stronger the reversal. 4. Large volume during these two trading days is a significant confirmation.Pattern psychology20The atmosphere beseems bearish once a strong downtrend has been in effect. The price goes down. Bears may move the price even further but before the day ends the bulls enters and bring a dramatic change in price in the opposite direction. They finish near the high of the day. The move has almost negated the price decline of the previous day. This now has the bears concerned. More buying the next day will confirm the move. Being able to utilize information that has been used successfully in the past is a much more workable investment strategy than taking shots in the dark.Keep in mind, when you are given privileged information about stock market tips, where youare in the food chain. Are you one of those privileged some that get top-notch pertinent information on a timely manner, or are you one of the mickle that feed into a frenzy and allow the smart money to make the profits? Bearish Harami In up trends, the harami consists of a large white candle followed by a small white or black candle (usually black) that is within the previous sessions large real body.Description Bearish Harami is a two candlestick pattern composed of small black real body contained within a prior relatively long white real body. The body of the first candle is the aforementioned(prenominal) color as that of the current trend. The open and the close occur inside the open and the close of the previous day. Its presence indicates that the trend is over. Criteria 1. The first candle is white in color the body of the second candle is black. 2. The second day opens lower than the close of the previous day and closes higher than the open of the prior day. 3. For a reversal signal, confirmation is needed. The next day should show weakness. 4. The uptrend has been apparent. A long white candle occurs at the end o f the trend. Signal enhancements 1. The reversal will be more forceful, if the white and the black candle are longer. 2. The lower the black candle closes down on the white candle, the more win over that a reversal has occurred, despite the size of the black candle.Pattern psychology21The bears open the price lower than the previous close, after a strong uptrend has been in effect and after a long white candle day. The longs get concerned and start profit taking. The price for the day ends at a lower level. The bulls are now concerned as the price closes lower. It is becoming evident that the trend has been violated. A weak day after that would entice everybody that the trend was reversing. Volume increases due to the profit taking and the addition of short sales.Bullish Harami A candlestick chart pattern in which a large candlestick is followed by a smaller candlestick whose body is located within the vertical range of the larger body. In downtrends, the harami consists of a larg e black candle followed by a small white or black candle (usually white) that is within the previous sessions large real body. This pattern signifies that the immediately preceding trend may be concluding, and that the bulls and bears have called a truce.Description The Harami is a commonly observed phenomenon. The pattern is composed of a two candle formation in a down-trending market. The color first candle is the uniform as that of current trend. The first body in the pattern is longer than the second one. The open and the close occur inside the open and the close of the previous day. Its presence indicates that the trend is over.22The Harami (meaning pregnant in Japanese) Candlestick Pattern is a reversal pattern. The pattern consists of two Candlesticks. The first candle is black in color and a continuation of the existing trend. The second candle, the little belly sticking out, is usually white in color but that is not always the case. Magnitude of the reversal is affected by the location and size of the candles. Criteria 1. The first candle is black in body the body of the second candle is white. 2. The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.3. The second day opens higher than the close of the previous day and closes lower than the open of the prior day. 4. Unlike the Western in spite of appearance Day, just the body needs to remain in the previous days body, where as the Inside Day requires both the body and the shadows to remain inside the previous days body.5. For a reversal signal, further confirmation is required to indicate that the trendis now moving up.Signal enhancements 1. The reversal will be more forceful if the black candle and the white candle are longer. 2. If the white candle closes up on the black candle then the reversal has occurred in a convincing manner despite the size of the white candle. Pattern psychology After a strong down-trend has been in effect and after a selling day, the bulls open at a price higher than the previous close. The shorts get concerned and start covering. The price for the day finishes at a higher level. This gives enough poster to the short sellers that trend has been violated. A strong day i.e. the next day would convince everybody that the trend was reversing. Usually the volume is above the novel norm due to the unwinding of short positions. When the second candle is a doji, which is a candle with an almost non-existent real body, these patterns are called harami crosses. They are however less reliable as reversal patterns as more indecision is indicated.23Doji Doji lines are patterns with the same open and close price. Its a significant reversal indicator.The Importance of the Doji The perfect doji session has the same opening and closing price, yet there is some flexibility to this rule. If the opening and closing price are within a few ticks of each other, the line could still be viewed as a doji. How do you decide whet her a near-doji day (that is, where the open and close are very close, but not exact) should be considered a doji? This is infixed and there are no rigid rules but one way is to look at a near-doji day in relation to recent action. If there are a series of very small real bodies, the near-doji day would not be viewed as significant since so many other recent periods had small real bodies. superstar technique is based on recent market activity.If the market is at an important market junction, or is at the mature part of a bull or bear move,or there are other technical signals sending out an alert, the appearance of a near-doji is interact as a doji. The philosophy is that a doji can be a significant warning and that it is better to attend to a false warning than to ignore a real one. To ignore a doji, with all its inherent implications, could be dangerous. The doji is a distinct trend change signal. However, the likelihood of a reversal increases if subsequent candlesticks confirm the dojis reversal potential. Doji24sessions are important only in markets where there are not many doji. If there are many doji on a particular chart, one should not view the emergence of a new doji in that particular market as a meaningful development. That is why candlestick analysis usually should not use intra-day charts of less than 30 minutes. Less than 30 minutes and many of the candlestick lines become doji or near doji Doji at tops A Doji star at the top is a warning that the uptrend is about to change. This is especially true after a long white candlestick in an uptrend. The reason for the dojis negative implications in uptrend is because a doji represents indecision. Indecision among bulls will not maintain the uptrend. It takes the conviction of buyers to sustain a rally. If the market has had an extended rally, or is overbought, then formation of a doji could mean the scaffolding of buyers support will give way. Doji are also valued for their ability to show reversal potential in downtrends. The reason may be that a doji reflects a balance between buying and selling forces. With ambivalent market participants, the market could fall due to its own weight. Thus, an uptrend should abolish but a falling market may continue its descent. Because of this, doji need more confirmation to signal a bottom than they do a top. What are support and resistance lines? supporting and resistance represent key junctures where the forces of supply and demand meet.These lines appear as thresholds to price patterns. They are the respective lines which stops theprices from lessen or increasing. A support line refers to that level beyond which a stocks price will not fall. It denotes that price level at which there is a sufficient amount of demand to stop and possibly, for a time, turn a downtrend higher. Similarly a resistance line refers to that line beyond which a stocks price will not increase. It indicates that price level at which a sufficient supply of stock is available to stop and possibly, for a time, head off an uptrend in prices. social movement lines are often referred to as support and resistance lines on an angle.Support A support is a horizontal floor where interest in buying a commodity is strong enough to surmount the pressure to sell. Support level is the price level at which sufficient demand exists to, at least temporarily, staunch a downward movement in prices. Logically as the price declines towards support and gets cheaper, buyers become more inclined to buy and sellers become less inclined to sell. By the time the price reaches the support level, it is believed that demand will overcome supply and keep the price from falling below support.25Support does not always hold true and a bring on below support signals that the bulls have incapacitated over the bears. A fall below support level indicates more willingness to sell and a lack of willingness to buy. A break in the levels of support indicates that the expectat ions of sellers are reducing and they are ready to sell at even lower prices. In addition, buyers could not be coerced into buying until prices declined below support or below the previous low. Once support is broken, another support level will have to be established at a lower level ITC showing support and resistanceResistance26A resistance is a horizontal ceiling where the pressure to sell is greater than the pressure to buy. Thus a Resistance level is a price at which sufficient supply exists to at least temporarily, halt an up(a) movement. Logically as the price advances towards resistance, sellers become more inclined to sell and buyers become less inclined to buy. By the time the price reaches the resistance level, it is believed that supply will overcome demand and prevent the price from rising above resistance.Resistance does not always hold true and a break above resistance signals that the bears have lost over the bulls. A break in the resistance level shows more willingn ess to buy or lack of incentive to sell. Resistance breaks and new highs indicate that buyers expectations have increased and are ready to buy at even higher prices. In addition, sellers could not be coerced into selling until prices rose above resistance or above the previous high. Once resistance is broken, another resistance level will have to be established at a higher level.What Does a Technical indicator offer? Technical analysts use indicators to look into a different view from which stock prices can be analyzed. Technical indicators provide unique outlook on the strength and direction of the underlying price action for a given timeframe. Why use indicators? Technical Indicators broadly serve three functions to alert, to confirm and to predict. Indicator acts as an alert to study price action, sometimes it also gives a signal to watch for a break of support. A large positive divergence can act as an alert to watch for a resistance breakout. Indicators can be used to confirm other technical analysis tools. Some investors and traders use indicators to predict the direction of future prices.Tips for using indicators There are a large number of Technical Indicators that can be used to assist you in selection of stocks and in tracking the right entry and exit points. In short, indicators indicate. But it doesnt mean that traders should ignore the price action of a stock and focus solely on the indicator. Indicators just filter price action with formulas. As such, they are derivatives and not direct reflections of the price action.While applying the indicators, the analyst should considerWhat is the indicator saying about the price action of a security? Is the price action getting stronger? Is it getting weaker? The buy and sell signals generated by the indicators, should be read in context with other technical analysis tools like candlesticks, trends, patterns etc. For example, an indicator may flash a buy signal, but if the chart pattern shows a descending triangle with a series of declining peaks, it may be a false signal. An indicator should be selected with due care and attention. It would be a futile exercise to cover more than fiver indicators. It is best to focus on two or three27indicators and learn their intricacies inside and out. One should always choose indicators that complement each other, instead of those that move in unison and generate the same signals. For example, it would be redundant to use two indicators that are good for showing overbought and oversold levels, such as random and RSI. Both of these indicators measure momentum and both have overbought/oversold levels. Types of indicators Indicators can broadly be divided into two types LEADING and LAGGING. Leading indicators Leading indicators are designed to lead price movements. Benefits of leading indicators are early signaling for entry and exit, generating more signals and allow more opportunities to trade. They represent a form of price momentum over a fix ed look-back period, which is the number of periods used to calculate the indicator. Some of the wellmore popular leading indicators include Commodity Channel Index (CCI), Momentum, Relative Strength Index (RSI), Stochastic Oscillator and Williams %R. fall back Indicators Lagging Indicators are the indicators that would follow a trend rather then predicting a reversal.A lagging indicator follows an event. These indicators work well when prices move in relatively long trends. They dont warn you of coming(prenominal) changes in prices, they simply tell you what prices are doing (i.e., rising or falling) so that you can investaccordingly. These trend following indicators makes you buy and sell late and, in exchange for missing the early opportunities, they greatly reduce your risk by keeping you on the right side of the market. Moving averages and the MACD are examples of trend following, or lagging, indicators. Oscillators Relative Strength Index (RSI) The RSI is part of a class of indicators called momentum oscillators.There are a number of indicators that fall in this category, the most common being Relative Strength Index, Stochastic, Rate of Change, Williams %R. Although these indicators are all calculated differently, there are a number of common elements to their use which shall be discussed in the context of the RSI. What is momentum? Momentum is simply the rate of change the speed or slope at which a stock or commodity ascends or declines. Measuring speed is a useful skunk of impending change. For example, assume that you were riding in a friends car, not looking at what was happening fore but instead just at the speedometer. You can see when the car starts to slow down and if it continues to do so you can reasonably assume its going to stop very shortly. You may not know the reason for it coming to a stopit28could be the end of the journey, approaching and intersection or because the road is a little rougher ahead. In this manner watching the spee d provides a behave for what may happen in the future. An oscillator is an indicator that moves back and forth across a reference line or between prescribed upper and lower limits. When an oscillator reaches a new high, it shows that an uptrend is gaining speed and is likely to continue. When an oscillator traces a lower peak, it means that the trend has stopped accelerating and a reversal can be expected from there, much like a car slowing down to make a U-Turn. In the same way watching a stock for impending momentum change can provide a glance of what may happen in the future momentum oscillators, such as RSI are referred to as trend leading indicators.The chart below illustrates the typical construction of the RSI which oscillates between 0% and 100%. You will notice there is a pair of horizontal reference lines 70% overbought and 30% oversold lines. The overbought region refers to the case where the RSI oscillator has locomote into a region of significant buying pressure rel ative to the recent past and is often an indication that an upward trend is about to end. Similarly the oversold region refers to the lower part of the momentum oscillator where there is a significant amount of selling pressure relative to the recent past and is indicative of an end to a down swing. Application of RSI RSI is a momentum oscillator generally used in sideways or ranging markets where the price moves between support and resistance levels.It is one of the most useful technical tool employed by many traders to measure the velocity of directional price movement. Overbought and Oversold The RSI is a price-following oscillator that ranges between 0 and 100. Generally, technical analysts use 30% oversold and 70% overbought lines to generate the buy and sell signals. Go long when the indicator moves from below to above the oversold line. Go short when the indicator moves from above to below the overbought line. Note here that the direction of crossing is important the indica tor needs to first go past the overbought/oversold lines and then cross back through them.29Silver Chart showing buy and sell points and also the failure in trending market What is the MACD and how is it calculated? The MACD does not completely fall into either the trend-leading indicator or trend following indicator it is in fact a hybrid with elements of both. The MACD comprises two lines, the sporting line and the slow or signal line. These are easy to identify as the slow line will be the smoother of the two. NIFTY chart below illustrates the basic MACD linesThe procedure for calculating the MACD lines is as follows Step1. Calculate a 12 period exponential function moving average of the close price. Step2. Calculate a 26 period exponential moving average of the close price. Step3. Subtract the 26 period moving average from the 12 period moving average. This is the fast MACD line. Step4. Calculate a 9 period exponential moving average of the fast MACD line calculated above. This is the slow or signal MACD line. Sampling Plan The companies are selected from top 50 blue chip companies, and then fundamental analysis is done and then the technical analysis Limitations As we know that equity market is highly unpredictable and its really hard to predict the future trend of the equity so all the analysis that is done just gives the high probability of the trend that is going to happen, it does not give any surety.30CHAPTER 3 FINDINGS AND ANALYSIS3.1 FindingsFundamental Analysis31Technical Analysis SBISBI-I32SBI II Chart SBI-I shows different support and resistance level for last two years. Chart SBI-II shows the aurora star which is encircled.33JINDAL STEELThe above chart shows inverted hammer with DOJI.34VOLTASThe above chart shows two inverted hammer.35BHELThe above chart shows inverted hammer with bullish candle.36HPCLThe above chart shows DOJI.373.2 AnalysisFundamental Analysis As we have analyzed from the list of companies on basis of fundamental grounds. I t tells us the company on which we should invest. The companies are-SBI38From the above figures one can come to following conclusion As a company should have high EPS and so is the case with SBI whose EPS is 256.11 Its P/E ratio is relatively lesser than other companies Positive PEG is a good sign. P/B is less than 1 which says it is undervalued so its high time to buy shares of this company. And on other grounds it has fair figures.BHELFrom the above figures one can come to following conclusion EPS is relatively high as compared to its per share price. Low P/E and P/S ratio which is always good. unspoilt dividend payout ratio, dividend and return on equity. HPCL From the above figures one can come to following conclusion EPS is relatively high as compared to its per share price. Its P/E ratio is relatively lesser than other companies P/B value is lesser which gives a clear indication that the prices will rise in future. Dividend is relatively higher.Technical analysis On the basis of technical analysis one can come to the following conclusionSBI From the chart SBI-II its seen that there is formation of morning star which is a sign of trend reversal. And from here it is expected that it will go bullish. We can also see that RSI is in upward direction which indicates that it will go bullish and even MACD is in favor of bullish nature. So it is very strongly recommended that one should invest in this share and should hold as long as there is a sign of trend reversal. JINDAL STEEL As from the chart we have seen that inverted hammer has occurred long before followed by bullish candle which was the sign of buying but not it has reached to such a level at which it can reverse anytime. The RSI is also high and MACD can anytime go for selling indication.39VOLTAS From the chart of Voltas it is very all the way indicated that there are two inverted hammer and the hammer is followed by a green candle and thus we can say it has taken the bullish trend. We can a lso see that RSI is in upward direction which indicates that it will go bullish and even MACD is in favor of bullish nature. So it is very strongly recommended that one should invest in this share and should hold as long as there is a sign of trend reversal. BHEL From the chart of Bhel it is very clearly indicated that there is a inverted hammer followed by a green candle and thus we can say ithas taken the bullish trend. We can also see that RSI is in upward direction which indicates that it will go bullish and even MACD is in favor of bullish nature. So it is very strongly recommended that one should invest in this share and should hold as long as there is a sign of trend reversal. HPCL From the chart of HPCL there is formation of a DOJI candle which is one of the strongest sign of trend reversal and for bullish trend to come in. We can also see that RSI is in upward direction which indicates that it will go bullish and even MACD is in favor of bullish nature. So it is very strong ly recommended that one should invest in this share and should hold as long as there is a sign of trend reversal40CHAPTER quadruple CONCLUSIONS AND RECOMMENDATIONS4.1 SUMMARYThis project is being done to construct portfolio of clients with the help of fundamental and technical analysis. Also analyze their portfolio by valuating those companies where they have already invested using specific valuation model. Then find out whether it is right time to invest in those companies using technical analysis. Also calculating the returns they are getting and suggest for higher return. As we can see we have come up with certain companies which have strong possibilities to do well. The different tools and indicators play a very vital role in analyzing the companies as well as forecasting their price behavior.4.2 RECOMMENDATIONS AND CONCLUSION RecommendationsThe final portfolio that I came up with is 1. SBI 2. JINDAL STEEL 3. VOLTAS 4. BHEL 5. HPCLConclusionIn this project we have found out tha t both the analysis fundamental andtechnical analysis can be used for the same purpose as to build a portfolio but they and completely different. One should not try to relate these two analysis with each other as it could lead to blunder. Both of the analysis are independent of each other. Both the analysis just gives a possibility that which picking one should go for in case one wants to invest. It doesnt confirms the result as they are just expected result.