The Hindu Business Line : Tech School

In the first lesson of Tech School, we dealt with the trend and the types of trend along with illustrations. In this column, we shall look at some of the complexities associated with the trend.

Technical analysis on a security can be done in different time frames such as long-term, intermediate-term, medium-term, short-term and intra day. Trends occur across these time frames in a fractal manner. In other words, price moves forming peaks and troughs in every time period. But the type of trend can vary between these time periods. For example, the trend could be down in the short-term, up in the medium-term, sideways in the long-term and so on.

To put this concept differently, every trend is a portion of its next bigger trend. In chart 1, (weekly chart of Suzlon Energy), one would notice that the stock has been on a steady long-term (more then one year time frame is said to be long-term) uptrend from its listing price of Rs 127 in October 2005. The rising trend line below the higher peaks and higher troughs highlights this up trend.

Chart 2 shows that though the long-term trend is up in Suzlon, the medium-term trend is down in the four months between the November 2006 peak and April 2007 trough. This is a correction or counter trend for the long-term up trendline. Within the medium-term downtrend there are short-term up and downtrends.

A trader or an investor can select the time-frame that he wants to trade or invest in, depending upon his inclination and investment horizon. If we go back to the example of Suzlon, a long-term investor would be holding the stock bought at lower levels since the long-term trend in the stock is up.

But a medium trader (swing trader) could have shorted the stock in December 2006 and booked profit around April 2007. Short-term and day traders would have executed numerous trades in the period, both buy and sell.

Multiple time frame analysis is about considering the trend across all the time frames in a particular stock to arrive at a decision at the kind of trade to execute. In this analysis, the trend in the larger time frame is said to prevail.

In Suzlon, it would be safer to buy in corrections rather than sell the rallies since the long-term trend in the stock is up. — Yoganand D.

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