The Indian equity indices have clearly outperformed their global peers so far in 2022. At the same time, threats from a global slowdown, as well as domestic factors such as high inflation and interest rates, remain. In the near to medium term, will the markets continue to go up, see volatility or decline?
In such uncertain situations, technical analysis comes in handy. Here’s detailing what charts and technical indicators can ideally be used for forecasting, depending on the time frames you intend to be in the market. We also tell you how the charts for different time frames can be combined together to make a holistic decision using a top-down approach.
Time frame, charts, indicators
When it comes to time frames, the definition varies with each market participant. So, we have classified the time frames as intraday, positional trading (one month), short-term (three to six months), medium-term (six to twelve months) and long-term (more than one year).
For the purpose of ease, we use candle stick charts for study. Also, among the various indicators, we take very few, such as moving average, Fibonacci retracements, trendlines, etc, which we feel will work the best, based on our experience. So, here’s how you can use candlestick charts and our preferred indicators for the time frame of your choice, to make a study:
15-minute and 1-hour chart
Charts that capture the price movements within a single day are the best fit for intraday traders. For stock markets such as India that are open only during the day for a little over six hours, any chart that is more than one hour may not be ideal to capture the movement within a single day.
In case of currencies where the market is open round-the-clock, 4-hour chart is ideal. This can be used in combination with the 1-hour charts instead of a 15-minute chart.
How to use?
Using two types of charts together is a good practice to identify the trend and the entry and exit levels for trading. For intraday, looking at the one-hour chart for a minimum of two to four weeks will give the big picture of the prevailing intraday trend. The more the data, the better. So, you can go beyond four weeks too.
The 15-minute chart can then be used to identify the micro movements within the big intraday trend.
A trendline will be an important indicator to identify the major supports and resistances. Along with that, the 20- and 50- hour moving averages can be used on the hourly charts to identify the supports and resistances.
To capture the broader trend for a period of one month, that is up to four weeks, daily charts are ideal.
How to use?
The daily chart can be combined with indicators like moving averages and trend lines. A minimum historical data of 45-trading days should be used to get a clear picture of the trend and strong supports and resistances. As mentioned above, the more the data seen (beyond 45 days), more the clarity will be on the big picture.
10- and 21-Day Moving Averages work well on the daily charts. They can be used to identify supports and resistances. In addition to this, to get the entry and exit points, Bollinger bands can be used.
Short- and medium-term
Daily, weekly and monthly charts
Monthly chart will give the big picture and the broader trend. It will also help in identifying the average movement in one month and therefore how far (maximum) the price can go for a period of next three, six and up to twelve months. Looking at the weekly chart after that will give a picture on the intermediate movement within the big trend.
How to use?
Identify the big trend in the monthly chart first. This will give an idea of where the price is headed for the next three to six months atleast. Then look at the weekly chart. That will give the direction for the short-term. Identifying the supports and resistances on the weekly chart will help in deciding whether to enter/exit immediately or wait for better levels.
Daily chart: 100- and 200- day moving average
Weekly chart: 21- and 100- week moving average
Monthly: 21- month moving average
Along with the moving averages the trendlines will have to be used. Fibonacci retracements will help in getting intermediate supports or resistances within the broader trend.
Monthly and Quarterly
Daily and weekly chart will not disclose the long-term trend. A quarterly chart will give an idea on how much the price can move in one quarter. This can be extrapolated for the longer range that we intend to be in the market. Monthly chart can give the direction of movement within one quarter.
How to use?
The monthly and quarterly charts will have to be used together. As mentioned above, the quarterly charts will give the broader trend. Monthly charts, together with the indicators, will help in identifying the supports and resistance for decision-making.
Monthly chart: 21- and 100- month moving average, Fibonacci retracements, Trendlines
Quarterly chart: Trendlines and Fibonacci retracements
Supports and resistances can always be broken. Entering at a support and exiting at a resistance may not work all the time. For instance, on the daily chart, the price can break below a moving average support during intraday trades but can bounce back and close the day above the moving average. So, confirmation and decision-making will have to be done based on the closing price only. Similarly, there is no rule that the price will turn around after touching the lower or upper band of a Bollinger band. In a strong uptrend, the price can move up continuously along the upper band and move continuously along the lower band in a downtrend.
To overcome these hitches, it is always better to see how the indicators and the prices have behaved in the past. Once again, the more the historical data taken for study, the better the understanding of the indicators’ behaviour.
Understanding the basics
Candle Stick chart
A type of chart constructed with the four points, the open, high, low and close price for a particular time period. The open and close price are connected in the shape of a bar, called the body of the candle. The high and low prices are connected to the body with a straight line and called a wick. On the daily chart, a single candle will represent the open, high, low and close price for that particular day. Similarly, on the weekly chart, a candle will represent the open, high, low and close price for a particular week. So, is the case for charts in other time frames
As the name implies, moving average is the average of all the closing prices for a specific time period. That is a 21-Day Moving Average is the average of closing price of the last 21 days (includes the current day). Every day, this average is calculated and is plotted as a line graph. Similarly, a 21-Week Moving Average will be the average of closing prices of the last 21 weeks (includes the current week also). The moving average is used as an indicator to identify supports and resistance. Combination of moving averages, like 10 and 21, 100 and 200 moving average, can be used for getting a bullish or a bearish signal.
This is calculated by taking the 20-Moving Average (MA) as a base. A 2 per cent standard deviation is taken above and below that moving average. These two standard deviations are plotted as continuous line and they form the upper and lower end of the band. They can be used as price targets to enter and exit. The 20-MA will be the median line. As long as the price stays above the 20-MA, the trend is up. Once the prices fall below the 20-MA, it indicates a trend reversal, and the price can then go down till the lower end of the band. Similarly, when the price crosses above the 20-MA, the outlook will be bullish, and the price can move up to the upper end of the band.
How far can the price retrace a downtrend or an uptrend? The Fibonacci retracement levels can be used to identify this. The length of a major upmove (from the lowest to highest price point) or a downmove (from highest to lowest price point) is calculated. By theory, the price can retrace 38,2, 50 and 61.8 per cent of the total length of move from the lowest point in a downtrend and the highest point in an uptrend.
A line drawn connecting either the lows or highs on a candle stick chart is known as the trendline. An up trendline is the one drawn upwards connecting at least two major lows. A down trendline is drawn downwards connecting at least two major highs. The up trendline will act as a good support in an uptrend. Similarly, a down trendline will act as a good resistance in a downtrend. Prices crossing below or above the up or down trendline respectively is one of the major indications of a trend reversal.
Support and Resistances
A support is a level at which the buyers will overcome the sellers to arrest the fall and take the price higher. A resistance is vice-versa. It is the level at which the sellers will overcome the buyers to stop the price rise and drag the prices lower.