What is TECHNICAL ANALYSIS ? - Part 1.

Introduction - What are you looking for?


First, I would like to say that just about everything you’ve ever been taught consists of beliefs. Anything that seems to be a fact is still relative and depends upon the semantics of the situation. It depends upon some assumptions you are making and the perspective you are bringing to the situation -all of which are also beliefs. You’ll become a lot less rigid and much more flexible and open in your thinking if you just consider “facts” to be “useful beliefs” that you’ve made up. What you will read from my articles also consists of beliefs. So try to view this in a relative fashion. I don't really know up to what level you know about technical analysis and other concepts. You may be better than me and your concepts may be healthier than mine. I am not trying to teach you anything or prove myself. There are several ways to reach one destination. I hope by the end of these articles, you will come to understand my point.


2. Who is losing?


First let us see who are losing in the market. Statistics say that 90% of total number of traders lose in the market. 5% breakeven and only the remaining 5% make money. Why this happens? Because they don't have the discipline to apply themselves. People just don't understand that without effort, nothing will pay. They will spend 20 years for becoming a graduate. Then they will spend several years for getting a professional qualification. They will spend five years to become a doctor after they decide to take that route. But they will become investors overnight. So the people who are losing in the market are not pure technical analysts or fundamental analysts. Getting tips or reading papers will not make them analysts. All these are aids in better understanding, but the basic concepts should be strong which should be made up by yourself. Just imagine a man acting as a doctor and treating people just by reading newspapers and watching TV channels. Or in this case (of stock market), I should say prescribes medicines for himself! Being a carpenter doesn’t happen by reading. It happens with experience.


3. Fundamental analysis and Technical Analysis


Fundamental analysis is seeking the reason and technical analysis is gauging the effect. Fundamental analysis needs certain privileged information which is hard to get. Information in technical analysis is easy to get provided you can read it. There are several ways to reach the destination. These are just two ways of it. Fundamental analysis is the technique of the big players and technical analysis is the technique of the common man. If you ask me which is better, I will definitely say fundamental analysis, because it satisfies your logic and rational thinking. But if you ask me what you can do, I can only say technical analysis because it is the only thing available for me to ever study about the market. If you ask me which is easier, I will definitely say, a microphone in each of these big players’ (the people who manipulate the market like FIIs and Mutual Funds) office! There you get the final result of these analysis reports! Since it is not available, and information in fundamental analysis is very hard to get, let us choose the difficult path of technical analysis.


4. What is Technical Analysis?


Technical Analysis is not something like rocket science or brain surgery. But it sure is like the army training. What you need is not utmost intelligence, but the resolve to act on your decisions quickly, given the decisions are derived from an objective analysis. There is no place for your hunch or this is no place for you to apply your intuition. Sixth sense just doesn’t work here for long. Mostly what people do is to walk into a terminal, look at the tape (the trading screen at the terminal) for sometime, then buy something just because it is either going up or going down. How will he know when it will stop going down or going up? This is what hunch trading is all about. And most people who lose, lose in this fashion.


Then comes the technical traders who uses the charts to trade. They will draw some lines and other things on the graph and say “bullish above 60, bearish below 50”. If you ask them after one week, they will say “bullish above 65, bearish below 55”. All in all, you won’t be able to trade at any time.


One thing we hear most in the trading circles is “If it takes out the high of today, the market will go up. So tomorrow is the day when you will know if this market is going to go up or down.” The next day also the same thing happens. But believe me, both of these things have a point. They truly hold some information. But the problem is the belief in your decision. If a scrip breaks its previous high, it shows the intent of the big players to take it higher. There are false breakouts which are crafted to drag people into long positions before a correction. There are other breakouts which catches the stop orders above the previous high (normally there are a lot at these points) and then retreats back into the previous trading range. So everyday evolves before you as different scenes of a film. But you have to read the story right. So each day is important. Technical analysis is not about looking for some strange patterns in a complex picture which represents the Open, High, Low, Close, Volume data in a strange way. Most people who look at technical charts for the first time will have a question at which the technical analyst will say “it needs a big explanation”. The question is – “How in this world can these strange lines and some curves predict a market which is manipulated by some big guns like foreign institutional investors and mutual funds?” Valid indeed. So we will try to answer this question.


5. Is Technical Analysis Effective?


One of the primary points people tend to make against technical analysis is that the Indian markets are highly manipulated by selected people such as Harshad Mehta and Deepak Parekh. So any rational approach such as fundamental analysis or technical analysis will not work in such an environment. But we have to understand that market is that which is manipulated. Without manipulation no market would move. People tend to think in the opposite direction and once they buy, they will become sellers soon. And at any given time, there will be equal number of people who think exactly in the opposite ways. So the markets would not move beyond a limit if it was not for manipulators. They also manipulate in the direction of the basic economic tides. They can't swim against the tide for long and those are the people who perish quickly who swim against the tide (like Harshad Mehta and Deepak Parekh). So the market consists of people who are manipulators, professional traders and the general public. Technical analysis is a concept made for the market which consists of manipulators also.


"No man can learn what he has not preparation for learning, however near to his eyes is the object. A chemist may tell his most precious secrets to a carpenter -- and he shall be never the wiser -- the secrets he would not utter to another chemist for an estate." Everybody sees people with diseases, anybody can buy medicines from the shops. But it will only be the doctor who can diagnose and prescribe the correct medicines. Why? Because he has the learning to do it. He uses some other tools to do it, but he knows how to use them.


6. How is Technical Analysis Effective? – The Market Story


In the long term, what manipulators are doing can be told as a story. Once they identify that a particular scrip or market is priced below its real worth (they have information), they will try to bring it down to a place where they can comfortably get in. They will spread bearish news and squeeze out all the available stock into the market. They will steadily work on this and accumulate shares up to the level which they can afford or which they can get. After that they will slowly mark it up using insider news spreading. They will use other insiders to slowly bid up the price and the prices start to move up. They will be ready to support it whenever needed so that the momentum is not lost.


Lastly the news spreads to the public and they start jumping into the market. The prices will normally more than double or even go up several times from the levels they started it all. When the volumes reach a particular level where the insiders can unwind what they have without bringing the price down too much, they start to unload. Once you try to read this kind of a story from the charts, it will not look as mystifying as it was before. You will be able to distinguish between scrips where big players are present and where they aren't. But when the market trends, almost all of the scrips start to move up. But only those scrips which are supported by the insiders will be having minimum downside movement because they don’t want the selling pressure to be too much. Because then they will have to buy more at a higher price than the price at which they had accumulated. Even for the manipulators, there is a limit up to which they can raise the money. Then at the top, at the end of the bull market, these scrips won’t go down all the way because they need time to unload quantity. But the other scrips which were moving only because of the trend and which were carried on by the public suffers the most in even the smallest of corrections. Like this, there are several ways to reason. Now what a technical analyst should do is to identify the different phases of this story. First a market goes down, then somebody accumulates the shares. At this point, it will be visible on the charts. The scrip will trade between a range. This itself is tradable. After the accumulation, it starts to move up. Then the trader also gets in. When the scrip roars to astounding levels, and there is selling, he gets out. But where does this go wrong? When people get in early, the operators will shake them out. Why? Because they are the ones who are manipulating the trading and somebody has to lose if somebody has to gain. If you gain, they will lose.


Now suppose after an accumulation phase, a scrip is starting to move up. Then a lot of people are also getting in. From where this stock is available? Now that the operator has cornered the scrip by accumulating a certain percentage of the available stock, the remaining floating stock will be available when it slowly goes up. If the normal traders get it at the beginning, they will sell it as the scrip goes up. Then who has to buy? The operator has to buy because he has to take the prices still up. So what he will prefer? Buying that stock at a cheaper price or at a higher price? Definitely cheaper. The operator will daytrade also to keep things safe. So when he sells some stock in daytrading, if you buy it, you gain at his expense. Will he like it? So when the people get in at the early stages, they will shake them out. This can only happen when there are a lot of people interested in it. So that is why they say, “when everybody sells, buy and when everybody buys, sell”. Now the good trader gets in when an accumulated share dips, and gets out when it spurts. He can do it several times in this long story. “Buy on weakness, sell on strength”. But if you choose the wrong stock, you sell yourself. So what a trader needs to do is to find out when the operator has the intention to take the scrip up. As I said earlier, there are several ways to reach the destination.

Continued - in Technical Analysis Part - 2