• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

If you are one of those investors who attempt to follow the technical analysts on television, most of the stuff the experts say might sound Greek to you. However, not all of it is that difficult to understand. Some technical indicators are fairly easy to understand and use.

Price is the most important indicator in technical analysis. Along with the stock price movement, we can correlate its volume behaviour for better forecasting. Volume is the number of units (shares) traded during a particular time period (it can be an hour, day, week, etc).

Though volume gets a step-brotherly treatment in relation to price in technical analysis, it serves the purpose of verifying the strength of the particular price move. Volume is plotted below the price chart. Take a look at the volume plotted below the price chart in chart 1. The investors/traders can keep an eye on volume movement along with price movement. This helps in forewarning them about an impending spurt in price movement when they observe a sudden spurt in volume (represented in the chart in circles).

This happens because company insiders (people in the know) buy or sell ahead of a major announcement.

Open interest is the number of outstanding contracts, in both futures and options, on a given day.

A long (buy) or short (sell) contract that has not been closed out or one that has not expired or been exercised is said to be an outstanding contract. Open interest increases when a buyer or a seller creates new contracts. This happens when the buyer initiates a fresh long position or the seller initiates a fresh short position. Conversely, the open interest decreases when the existing contracts are squared up or exercised or allowed to expire.

Chart 2 includes open interest plotted along with the price. A sudden spurt in open interest or a sharp decrease too can make an investor alert to a potential up-move or a reversal, as discussed below.

Stock prices either move up, down or sideways. Studying the volume and open interest action along with the price action assists the investor in resolving the strength of an existing trend, whether up or down.

If we notice that the volume and open interest are both increasing, then it is inferred that the current price trend (up or down) is likely to continue in its present direction.

When the increase in the stock price of a particular company is accompanied by an increase in volume and open interest, it implies that the investors/ traders are flocking to the counter. As long as fresh droves of investors/traders, reflected in high volume and open interest, are interested in a particular stock, the price will continue to move in an upward trajectory.

This holds true in a stock that is declining as well. When the stock price decline is accompanied by increasing volume and the open interest, it is inferred as bearish, the reason being that all the investors who bought the stock at higher levels are yet to exhaust their holdings.

The downward movement will end only when all the short-term investors have divested their holdings.

If we extend this logic further, the decline in volume and open interest indicates that the current price trend (up or down) of the stock is possibly close to end.

When the stock price of a particular company is rising along with the declining volume and the open interest, it is inferred as a sign of bearishness and that the stock’s uptrend may be close to an end.

This shows that investors are getting wary as the price moves higher and are unwilling to buy in cash or hold derivative positions in the stock. So the up-move loses momentum and can even reverse.

Similarly, when the stock price of a particular company is declining along with the decreasing volume and the open interest, it is inferred as signs of bullishness because the stock’s present downtrend may come to an end.

Decrease in selling pressure is generally perceived as a precursor to an increase in the stock price.

More Stories on : Stock Markets | Technical Analysis | Young Investor

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Stuck in second gear, it just hasn’t been their year

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line