Technical Analysis

Technical analysis examines past market data—primarily price and volume—to predict future price direction. It operates on three core assumptions: (i) market price reflects all available information, (ii) prices move in trends, and (iii) history tends to repeat itself because market participants react in similar ways.

In the Indian context, SEBI recognises technical analysis as a legitimate tool for portfolio managers and distributors, provided it is used alongside risk‑management practices. The NISM syllabus emphasises that distributors should be able to read charts, explain indicators, and disclose the limitations of technical methods to clients.

For the exam, you will be asked to identify chart types, compute simple indicators such as SMA, and recognise the meaning of over‑bought or over‑sold signals. Remember that the regulator does not prescribe a specific indicator; the focus is on conceptual understanding and correct calculation.

A trend is the general direction in which a security’s price moves over a period. Trends are classified as up‑trend (higher highs and higher lows), down‑trend (lower lows and lower highs), or sideways (range‑bound) where neither direction dominates.

Support refers to a price level where buying interest is expected to be strong enough to halt a decline, while resistance is a level where selling pressure may prevent further rise. These levels are identified by prior price reversals, pivot points, or moving‑average lines.

Exam questions often present a short price series and ask you to mark the support and resistance zones. A common mistake is to label a single candle’s high as resistance without confirming that price has previously struggled to rise above that level.

The three most common chart formats in Indian brokerage platforms are line charts, bar charts, and candlestick charts. A line chart simply connects closing prices, useful for spotting long‑term trends.

Bar charts display Open, High, Low, and Close (OHLC) for each period, giving a fuller picture of price action. Candlestick charts convey the same OHLC data but use colour‑coded bodies to highlight bullish (close > open) or bearish (close < open) sessions, making patterns easier to visualise.

For the NISM exam, you may be asked to identify a bullish engulfing candlestick or a doji. Remember: a doji indicates market indecision and often precedes a reversal if it appears at a support or resistance level.

Moving averages smooth out price fluctuations to highlight the underlying trend. The most widely used are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). SMA gives equal weight to each price in the look‑back period, while EMA assigns more weight to recent prices, reacting faster to changes.

In practice, a 50‑day SMA is often used to gauge the medium‑term trend, whereas a 200‑day SMA signals the long‑term direction. A crossover of a short‑term SMA above a long‑term SMA is interpreted as a bullish signal ("golden cross"), and the opposite crossover is a bearish signal ("death cross").

Exam scenarios frequently present a series of closing prices and ask you to compute the SMA for a given period. Ensure you use the correct number of observations and include the current day’s price in the sum.

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It oscillates between 0 and 100 and is typically calculated over 14 periods.

An RSI above 70 suggests the security may be over‑bought (potentially due for a pull‑back), while an RSI below 30 indicates it may be over‑sold (possible rebound). Traders often look for divergences between RSI and price to anticipate reversals.

For the exam, you may be given average gains and losses for a 14‑day period and asked to compute the RSI. Remember the two‑step calculation: first find RS = Average Gain ÷ Average Loss, then apply the RSI formula.

MACD is a trend‑following momentum indicator calculated as the difference between a fast EMA (usually 12 periods) and a slow EMA (usually 26 periods). The result is plotted as the MACD line.

A 9‑period EMA of the MACD line, called the signal line, is overlaid on the MACD line. When the MACD line crosses above the signal line, it generates a bullish signal; a cross below generates a bearish signal. The histogram shows the distance between the MACD line and the signal line, helping to visualise the strength of the signal.

Exam questions may present a simplified MACD table and ask you to interpret a bullish crossover. The key is to remember the standard periods (12, 26, 9) and the direction of the cross.

Volume represents the number of shares traded during a period and is a vital confirmation tool. Rising price accompanied by increasing volume suggests strong buying interest, whereas a price rise on falling volume may indicate a weak move prone to reversal.

On‑Balance Volume (OBV) is a cumulative indicator that adds volume on up‑days and subtracts on down‑days. A rising OBV confirms an up‑trend, while a falling OBV confirms a down‑trend.

In the NISM exam, you may be asked to choose the correct statement about volume‑price relationship or to identify a volume spike that validates a breakout.

Chart patterns are specific formations that suggest continuation or reversal of the prevailing trend. The most frequently tested patterns are Head‑and‑Shoulders, Double Top/Bottom, Triangles (ascending, descending, symmetrical), and Flags.

A Head‑and‑Shoulders pattern consists of three peaks, with the middle peak (head) higher than the two shoulders. Its breakout below the neckline signals a reversal from up‑trend to down‑trend.

Triangles indicate consolidation. An ascending triangle (flat top, rising bottom) is bullish, while a descending triangle (flat bottom, falling top) is bearish. Confirmation requires a breakout beyond the trendline.