PROJECT REPORT

ON

Equity Research on Pharma Sector

BY

Pritam Jadhav

Under the Guidance of

PROF. Trupti Naik

Submitted in partial fulfillment of the requirements for qualifying

MMS - Finance, Semester-III Examination

Vidyalankar Institute of Technology

Vidyalankar Campus, Vidyalankar Coll Marg,

Wadala (E). Mumbai-400 037.

University Of Mumbai

2011-2013

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DECLARATION

I the undersigned solemnly declare that the report of the project work entitled Equity

Research on Pharma Sector is based on my own work carried out during the course of my

Summer Internship under the supervision of Mr. Ravi Nathani

I assert that the statements made and conclusions drawn are an outcome of the project work.

I further declare that to the best of my knowledge and belief that the project report does not

contain any part of any work which has been submitted for the award of any other

degree/diploma/certificate in this University or any other University.

______________

(Signature of the Candidate)

Pritam Jadhav

Name of the Candidate

Roll No.: 11-E20

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ACKNOWLEDGEMENT

There are many people who have helped me directly and indirectly to complete this project successfully.

First I would like to thank my project guide Mr.Ravi Nathani and faculty Prof.Trupti Naik for guiding me through out the project. Without her help it would have been impossible for me to complete this project. They helped me in each step of progress and motivated me throughout. I am also thankful to all my friends who helped me to understand the technical aspects of the project and complete my research survey.

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INDEX

TopicNo.

Title Page No.

1 Executive Summary / Abstract 62 Objective of Study 73 Stock Market Basic 8 - 104 Corporate Securities And Derivatives Market 11 - 125 Equity (Stocks) 12 - 136 History of Stock Broking Fund 147 Stock Exchange 15 - 178 Difference Between Technical And Fundamental Analysis 18 - 199 FII And Stock Market 20 - 2210 Types Of Charts 23 - 2511 Trend Analysis 26 - 3512 Chart Patterns 36 - 5313 Candlestick Pattern 54 - 61

14 Indicators And Oscillators 62 - 6315 Pharmaceutical Sector Analysis Report 64 - 6916 Prospect 7017 Conclusion 71

* Bibliography 72

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Executive summary

What Is Technical Analysis?  

Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. 

Just as there are many investment styles on the fundamental side, there are also many different

types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators,

and most use some combination of the two. In any case, technical analysts' exclusive use of historical

price and volume data is what separates them from their fundamental counterparts. Unlike

fundamental analysts, technical analysts don't care whether a stock is undervalued - the only thing

that matters is a security's past trading data and what information this data can provide about where

the security might move in the future. 

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OBJECTIVE

This study is aimed at undertaking technical analysis of selected companies in cluded in the

CNX Nifty and the PHARMA SECTOR of BSE.

Following are the main objective of this report:-

To understand and demonstrate the movement of stock prices of top 5 companies of

the pharma sector through technical analysis.

To explain the various tools of technical analysis that can be used in forecasting stock

prices.

SCOPE

This project mainly focuses on trading decisions by predicting future stock price movement

by the use of technical analysis. The Application of the technical tools is limited to PHARMA

sector of BSE and its top five stocks only.

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STOCK MARKET BASIC

W h a t a r e c o rp o r a t i o n s ?

Companies are started by individuals or may be a small circle of people.

They pool their money or obtain loans, raising funds to launch the business.

A choice is made to organize the business as a sole proprietorship where one

Person or a married couple owns everything, or as a partnership with others who

may wish to invest money. Later they may choose to "incorporate". As a

Corporation, the owners are not personally responsible or liable for any debts of

the company if the company doesn't succeed. Corporations issue official-looking

sheets of paper that represent ownership of the company. These are called stock

certificates, and each certificate represents a set number of shares. The total

number of shares will vary from one company to another, as each makes its own

choice about how many pieces of ownership to divide the corporation into. One

corporation may have only 2,500 shares, while another, such as IBM or the Ford

Motor Company, may issue over a billion

Shares. Companies sell stock (pieces of ownership) to raise money and provide

funding for the expansion and growth of the business. The business founders

give up part of their ownership in exchange for this needed cash. The expectation

is that even though the owners have surrendered a portion of the company to the

Public, their remaining share of stock will become increasingly valuable as the

business grows. Corporations are not allowed to sell shares of stock on the open

Stock market without the approval of the Securities and Exchange Commission

(SEC). This transition from a privately held corporation to a publicly traded one is

Called going public, and this first sale of stock to the public is called an initial

public offering, or IPO.

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W h y d o p e o p l e i n ve s t i n t h e s t o c k m a r ke t ?

When you buy stock in a corporation, you own part of that company. This

gives you a vote at annual shareholder meetings, and a right to a share of future

profits.

When a company pays out profits to the shareholder, the money received is

called a "Dividend".

The corporation's board of directors choose when to declare a dividend and

how much to pay. Most older and larger companies pay a regular dividend, most

newer and smaller companies do not.

The average investor buys stock hoping that the stock's price will rise, so the

shares can be sold at a profit. This will happen if more investors want to buy

stock in a company than wish to sell. The potential of a small dividend check is

of little concern.

What is usually responsible for increased interest in a company's stock is the

prospect of the company's sales and profits going up.

A company who is a leader in a hot industry will usually see its share price rise

dramatically.

Investors take the risk of the price falling because they hope to make more

money in the market than they can with safe investments such as bank CD's or

government bonds.

What is a stock market index?

In the stock market world, you need a way to compare the movement of the market,

up and down, from day to day, and from year to year. An index is just a benchmark or

yardstick expressed as a number that makes it possible to do this comparison. For e.g.

S&P CNX Nifty is the index of NSE and SENSEX is the index of BSE.

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The price per share, like the market cap, has nothing to do with how big a company

is.

The Securities Market consists of two segments, viz. Primary market and

Secondary market. Primary market is the place where issuers create and issue equity,

debt or hybrid instruments for subscription by the public; the Secondary market enables

the holders of securities to trade them.

Secondary market essentially comprises of stock exchanges, which provide platform

for purchase and sale of securities by investors. In India, apart from the Regional

Stock

Exchanges established in different centers, there are exchanges like the

National Stock Exchange (NSE) and the Over the Counter Exchange of India

(OTCEI), who provide nation wide trading facilities with terminals all over the

country. The trading platform of stock exchanges is accessible only through

brokers and trading of securities is confined only to stock exchanges.

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C o r p o r a t e S ec u r i t i e s :

The no of stock exchanges increased from 11 in 1990 to 23 now. All the

exchanges are fully computerized and offer 100% on-line trading. 9644

companies were available for trading on stock exchanges at the end of March

2002. The trading platform of the stock exchanges was accessible to 9687

members from over 400 cities on the same date.

De r iva t i v es M a r k e t :

Derivatives trading commenced in India in June 2000. The total exchange

traded derivatives witnessed a volume of Rs. 442,343 crore during 2002-03 as

against Rs.

4018 crore during the preceding year. While NSE accounted for about 99.5%

of total turnover, BSE accounted for about 0.5% in 2002-03. The market

witnessed higher volumes from June 2001 with introduction of index options, and

still higher volumes with introduction of stock options in July 2001. There

was a spurt in volumes in November 2001 when stock futures were

introduced. It is believed

that India is the largest market in the world for stock futures.

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Equity (Stocks)

When you hear the words shares, stocks, equity, markets, stock exchange, Sensex, Nifty - they are roughly pointing out to the same idea of 'risky assets'. There is no guarantee regarding how much money would you get back in say, 1 year or 3 years. In a long term, their returns are higher than FD rates or inflation. You might have almost tripled your money or lost two-third of it, depending on when did you invest in the equity markets between 2007-2010.

In simplest terms, equity or stocks are like small, micro pieces of ownership in a business (equity means ownership). The words stocks, shares and equity (or equities) are used interchangeably and that is source of confusion for many beginners. Stock exchanges facilitate buying and selling of stocks and BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) are the major exchanges in India. Sensex denotes the cumulative price of top 30 stocks in BSE and Nifty denotes the cumulative price of top 50 stocks. 

If you have stocks of a company, you can vote to choose its board, which in turn selects the management (CEO, MD, President and others below. However, for an individual investor, its not the decision-making rights, but the claim in company's profit, which is important. At the end of a quarter or year, if the company has accumulated some profit and can think of new and exciting opportunities to employ this money, it will try to grow your money further. Otherwise, it will try to return the profits to the owners (you) in form of dividends.

Here, we'll try to answer some of frequently asked and misunderstood questions about stocks.

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When to invest in markets?

Saying that, finding a good or bad time to invest in markets is extremely difficult, is an understatement. All the highly paid and extremely talented economists and finance whizzes have been grappling with this question for decades. What you should really do:

Find your asset allocation or portfolio mix Save and invest every month Invest in equity mutual funds, debt mutual funds or FDs Split your investments in the options above according to your asset allocation

Which stock will go up?

When you are trying to answer the question which stock will go up or which stock to buy, you are trying to solve the million dollar question - what should be the right price of this stock? If the current price is lower than this 'right price', the stock is undervalued and it will go up, and vice versa.

The price of any financial security is given by the present value of its future earnings. A stock provides earnings to the investor through dividends. So any valuation of stock is essentially the present value of all its future dividends. However, there are so many factors (company specific, industry specific, economy specific, etc.) involved in the actual estimation of dividends that it becomes impossible to actually predict.

Any stock valuation model works on the principal of 'garbage in, garbage out', and is as good as your assumptions.

The most important thing is to understand here is that the price is right. One can never say whether the right price of a stock should be lower or higher than the current price. If there are

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hundred players in the market, the current price reflects the collective opinion of those 100 investors. 50 would be ready to buy at current price of say, Rs. 100 and 50 would be ready to sell. If 60 players start thinking that the stock will go up, the stock would actually go up to say, Rs. 110. If 90 players start thinking that the company is going to be bankrupt, the price would crash down to say, Rs. 25.

HISTORY OF THE STOCK BROKING INDUSTRY

Indian Stock Markets are one of the oldest in Asia. Its history dates back to

nearly 200 years ago.

In 1887, they formally established in Bombay, the "Native Share and Stock

Brokers' Association" (which is alternatively known as "The Stock Exchange"). In

1895, the Stock Exchange acquired a premise in the same street and it was

inaugurated in 1899. Thus, the Stock Exchange at Bombay was consolidated.

Thus in the same way, gradually with the passage of time number of exchanges

were increased and at currently it reached to the figure of 24 stock exchanges.

This was followed by the formation of associations /exchanges in Ahmadabad

(1894), Calcutta (1908), and Madras (1937).

In order to check such aberrations and promote a more orderly development of

the stock market, the central government introduced a legislation called the

Securities Contracts (Regulation) Act, 1956. Under this legislation, it is

mandatory on the part of stock exchanges to seek government recognition. As of

January 2002 there were 23 stock exchanges recognized by the central

Government. They are located at Ahmadabad, Bangalore, Baroda,

Bhubaneswar, Calcutta, Chennai,(the Madras stock Exchanges ), Cochin,

Coimbatore, Delhi, Guwahati, Hyderabad, Indore, Jaipur, Kanpur, Ludhiana,

Mangalore, Mumbai(the National Stock Exchange or NSE), Mumbai (The Stock

Exchange), popularly called the Bombay Stock Exchange, Mumbai

(OTCExchange of India), Mumbai (The Inter-connected Stock Exchange of

India), Patna, Pune, and Rajkot. Of course, the principle bourses are the National

Stock

Exchange and The Bombay Stock Exchange, accounting for the bulk of the

business done on the Indian stock market.13

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BSE ( BOM BAY STOCK EXCHANGE )

The Stock Exchange, Mumbai, popularly known as "BSE" was

established in 1875 as "The Native Share and Stock Brokers Association". It is

the oldest one in Asia, even older than the Tokyo Stock Exchange, which was

established in 1878. It is the first Stock Exchange in the Country to have obtained

permanent recognition in 1956 from the Govt. of India under the Securities

Contracts (Regulation) Act, 1956.

A Governing Board having 20 directors is the apex body, which decides

the policies and regulates the affairs of the Exchange. The Governing Board

consists of 9 elected directors, who are from the broking comm

Unity (one third of them retire ever year by rotation), three SEBI nominees, six

public representatives and an Executive Director & Chief Executive Officer and a

Chief Operating Officer.

N SE (NAT IONA L ST OC K EXCHANGE )

NSE was incorporated in 1992 and was given recognition as a stock

exchange in April 1993. It started operations in June 1994, with trading on the

Wholesale Debt Market Segment. Subsequently it launched the Capital Market

Segment in November 1994 as a trading platform for equities and the Futures

and Options Segment in June 2000 for various derivative instrument

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M C X (M U L T I C OMMO D I T Y E X C HAN G E )

‘MULTI COMMODITY EXCHANGE’ of India limited is a new order exchange

with a mandate for setting up a nationwide, online multi-commodity market place,

offering unlimited growth opportunities to commodities market participants. As a

true neutral market, MCX has taken several initiatives for users in a new

generation commodities futures market in the process, become the country’s

premier exchange.

MCX, an independent and a de-mutualized exchange since inception, is all

set up to introduce a state of the art, online digital exchange for commodities

futures trading in the country and has accordingly initiated several steps to

translate this vision into reality.

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NCD E X ( NA T IONAL CO M M ODI T I E S AND D E RI V A T I V E S EX CHANG E )

NCDEX started working on 15th December, 2003. This exchange

provides facilities to their trading and clearing member at different 130 centers for

contract. In commodity market the main participants are speculators,

hedgers and arbitrageurs.

F acilities Pr ovided B y NCD E X

NCDEX has developed facility for checking of commodity and also

provides a wear house facility

By collaborating with industrial partners, industrial companies, news

agencies, banks and developers of kiosk network NCDEX is able to

provide current rates and contracts rate.

To prepare guidelines related to special products of securitization NCDEX

works with bank.

To avail farmers from risk of fluctuation in prices NCDEX provides

special services for agricultural.

NCDEX is working with tax officer to make clear different types of

sales and service taxes.

NCDEX is providing attractive products like “weather derivatives”

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Difference between Technical and Fundamental Analysis

Technical analysis and fundamental analysis are the two main attentions in the financial

markets. Mainly, technical analysis looks at the price movement of a security and uses

this data to predict its future price movements. Fundamental analysis, on the other

hand, looks at economic factors, known as fundamentals.

Charts vs. Financial Statements

At the most basic level, a technical analyst approaches a security from the charts, while

a fundamental analyst starts with the financial statements. By looking at the balance

sheet, cash flow statement and income statement, a fundamental analyst tries to

determine a company’s value. In financial terms, an analyst attempts to measure a

company’s fundamental value. In this approach, investment decisions are fairly easy to

make - if the price of a stock trades below its intrinsic value, it’s a good investment.

Technical traders, on the other hand, believe there is no reason to analyze a company’s

fundamentals because these are all accounted for in the stock’s price. Technicians

believe that all the information they need about a stock can be found in its charts.

Time approach for both the technique

Fundamental analysis takes a relatively long-term approach to analyzing the market

compared to technical analysis. While technical analysis can be used on a timeframe of

weeks, days or even minutes, fundamental analysis often looks at data over a number

of years.

The different timeframes that these two approaches use is a result of the nature of the

investing style to which they each adhere. It can take a long time for a company’s value

to be reflected in the market, so when a fundamental analyst estimates intrinsic value, a

gain is not realized until the stock’s market price rises to its “correct” value. This type of

investing is called value investing and assumes that the short-term market is wrong, but

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that the price of a particular stock will correct itself over the long run. This “long run” can

represent a timeframe of as long as several years, in some cases.

Furthermore, the numbers that a fundamentalist analyzes are only released over long

periods of time. Financial statements are filed quarterly and changes in earnings per

share don’t emerge on a daily basis like price and volume information. Also remember

that fundamentals are the actual characteristics of a business. New management can’t

implement sweeping changes overnight and it takes time to create new products,

marketing campaigns, supply chains, etc. Part of the reason that fundamental analysts

use a long-term timeframe, therefore, is because the data they use to analyze a stock is

generated much more slowly than the price and volume data used by technical

analysts.

Trading Versus Investing

Not only is technical analysis more short term in nature that fundamental analysis, but

the goals of a purchase (or sale) of a stock are usually different for each approach. In

general, technical analysis is used for a trade, whereas fundamental analysis is used to

make an investment. Investors buy assets they believe can increase in value, while

traders buy assets they believe they can sell to somebody else at a greater price.

Technical analysis has only recently begun to enjoy some mainstream credibility. While

most analysts on Stock Exchanges focus on the fundamental side, just about any major

brokerage now employs technical analysts as well.

FIIs and Stock Market

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FIIs are Foreign Institutional Investors. A term that is commonly found whenever there’s

a discussion on stock markets. FIIs are entities (banks, insurance companies, mutual

funds etc) registered in a country other than in which they are investing. For e.g. a US

Mutual Fund which invests in the Indian Stock Market. FIIs usually pool large sums of

money and invest those in securities, real property and other investment assets. As

bulks of their investments are in the stock market, the inflow or outflow of money by FIIs

affect the stock market movement significantly.

In India, Foreign Institutional Investors are not permitted to invest in equity issued by an

Asset Reconstruction Company. They are also not allowed to invest in any company

which is engaged or proposes to engage in the following activities:- Business of chit

fund, Nidhi Company, Agricultural or plantation activities, Real estate business or

construction of farm houses (real estate business does not include development of

townships, construction of residential/commercial premises, roads or bridges).Trading in

Transferable Development Rights (TDRs).

The presence of institutional investors has its own plus and minus points.

On the brighter side –

FIIs always purchase stocks on the basis of fundamentals. And this means that it is

essential to have information to evaluate, so research becomes important and this leads

to increasing demands on companies to become more transparent and more

disclosures. This will lead to reduction in information asymmetries.

The increasing presence of this class of investors leads to reform of securities trading

and transaction systems, nurturing of securities brokers, and liquid markets.

FII inflow increasing every year will bring the very welcome inflow of foreign capital.

Attracting foreign capital is the main reason for opening up of the stock markets for FIIs.

If FIIs are investing huge amounts in the Indian stock exchanges then it reflects their

high confidence and a healthy investor sentiment for our markets. They have improved

the breadth and depth of Indian markets.

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FII inflows help in financial innovation and development of hedging instruments. Also, it

not only enhances competition in financial markets, but also improves the alignment of

asset prices to fundamentals.

FIIs as professional bodies of asset managers and financial analysts enhance

competition and efficiency of financial markets

On the Flipside -

There are always some dangers if certain limits are exceeded. Firstly, the foreign capital

is free and unpredictable and is always on the look out of profits. FIIs frequently move

investments, and those swings can be expected to bring severe price fluctuations

resulting in increasing volatility. Infact the FIIs are greatly responsible for causing

volatility in Indian market.

Increased investment from overseas may shift control of domestic firms to foreign

hands.

The FIIs profit from investing in emerging financial stock markets. If the cap on FII is

high then they can bring in huge amounts of funds in the country’s stock markets and

thus have great influence on the way the stock markets behaves, going up or down. The

FII buying pushes the stocks up and their selling shows the stock market the downward

path. This creates problems for the small retail investor, whose fortunes get driven by

the actions of the large FIIs.

FII flows leading to appreciation of the currency may lead to the exports industry

becoming uncompetitive.

FIIs Effect on Stock Market

While analysing a stock, the percentage of FII holding is an important factor to be noted.

When % holdings of FIIs increases in a stock its stocks price goes up and when it

drops, its share price comes down. However, readers should not take that as a negative

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remark.  If an FII invests in a company, it also means that they see growth potential in

that company.

If the number is too large then it’s easier for the individual entities to move out of a stock

which would make stock price of the company very volatile and risky. So, investing in a

company which has smaller number of FIIs could be a safer investment option.

A fundamentally sound company which has a consistent and stable FII shareholding

would be an ideal candidate for investment.  When some FIIs exit from a good stock, its

price actually falls thus giving a good chance to invest in it. However be sure to check

the reason for the FIIs exiting the stock. If it is due to change in the fundamentals of the

company, it is a negative sign.

Types Of Charts

There are three main types of charts that are used by investors and traders depending

on the information that they are seeking and their individual skill levels. The chart types

are:

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1. The line chart,

2. The bar chart, and

3. The candlestick chart

1. Line Chart

The most basic of the three charts is the line chart because it represents only the closing prices over a set period of time. The line is formed by connecting the closing prices over the time frame. Line charts do not provide visual information of the trading range for the individual points such as the high, low and opening prices. However, the closing price is often considered to be the most important price in stock data compared to the high and low for the day and this is why it is the only value used in line charts.

2. Bar Charts

The bar chart expands on the line chart by adding several more key pieces of information to each data point. The chart is made up of a series of vertical lines that represent each data point. This vertical line represents the high and low for the trading period, along with the open and close price. The close and open are represented on the

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vertical line by a horizontal dash. The opening price on a bar chart is illustrated by the dash that is located on the left side of the vertical bar. Conversely, the close is represented by the dash on the right. Generally, . When open is higher than close the chart is said to be a Green bar. When open is lower than close the chart is said to be a Red bar.

3. Candlestick Chart

The candlestick chart is similar to a bar chart, but it differs in the way that it is visually

constructed. Similar to the bar chart, the candlestick also has a thin vertical line showing

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the period's trading range. The difference comes in the formation of a wide bar on the

vertical line, which illustrates the difference between the open and close. There are two

colour constructs for days up and one for days that the price falls. When the price of the

stock is up and closes above the opening trade, the candlestick will usually be white or

clear. If the stock has traded down for the period, then the candlestick will usually be red

or black.

TREND ANALYSIS

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There are three types of trend

1. BULLISH (UPTREND)

2. BEARISH (DOWNTREND)

3. FLATISH (SIDEWARDS)

Bullish Trend

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Definition of a bullish trend :-

An uptrend /bullish trend is a sequence of higher tops and higher bottom.

Uptrend lines act as support and indicate that net-demand is increasing even as

the price rises. A rising price combined with increasing demand is very bullish,

and shows a strong determination on the part of the buyers.

Thus, Whenever the peak / top is broken it is said as a bullish breakout - result a

buy signal is ruled out with a stop loss of bottom.

The above figure of Sun Pharmaceuticals ltd. is in and continues bullish trend for

the past 52- weeks showing higher tops and higher bottoms thus whenever the

high is broken it is a buy signal.

Bearish Trend

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Definition of a bearish trend

An down/bearish trend is a sequence of lower tops and lower bottom.

The second high must be lower than the first for the line to have a negative

slope. Downtrend lines act as resistance, and indicate that net-supply (supply less

demand) is increasing even as the price declines. A declining price combined with

increasing supply is very bearish, and shows the strong resolve of the sellers.

Thus, whenever the bottom / support is broken it is said as a bearish breakout -

result a sell signal is ruled out with a stop loss of peak.

The above figure of GAIL ltd. is in and continues bearsih trend for the past 52-

weeks showing lower tops and lower bottoms thus whenever the low is broken it is a

sell signal.

Flattish Trend

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Definition of a flattish trend :-

Trading between range with similar tops and similar bottoms.

Such pattern on charts indicate flat consolidation in the market whereas trade

above / below the range would give breakouts (negative / positive)

The above figure of LIC Housing Finance ltd. was in flattish trend for the 3 month

period of October- December (2011).

Trend Lines

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Technical analysis is built on the assumption that prices move in a trend. Trend Lines

are an important tool in technical analysis for both trend identification and confirmation.

A trend line is a straight line that connects two or more price points and then extends

into the future to act as a line of support or resistance.

Types of Trend lines Bullish

An bullish pattern has a positive

slope and is formed by connecting two or more low points. The second low must be

higher than the first for the line to have a positive slope. Uptrend lines act as support

and indicate that net-demand (demand less supply) is increasing even as the price

rises. A rising price combined with increasing demand is very bullish, and shows a

strong determination on the part of the buyers. As long as prices remain above the trend

line, the uptrend is considered solid and intact. A break below of this trend indicates that

net-demand has weakened and a change in trend could be imminent.

Bearish

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A bearish pattern has a negative slope and is formed by connecting two or more high

points. The second high must be lower than the first for the line to have a negative

slope. Downtrend lines act as resistance, and indicate that net-supply (supply less

demand) is increasing even as the price declines. A declining price combined with

increasing supply is very bearish, and shows the strong resolve of the sellers. As long

as prices remain below the downtrend line, the downtrend is solid and intact. A break

above this trend indicates that net-supply is decreasing and that a change of trend could

be imminent.

Support & Resistance

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Once you understand the concept of a trend, the next major concept is that of support

and resistance. You'll often hear technical analysts talk about the ongoing battle

between the bulls and the bears, or the struggle between buyers (demand) and sellers

(supply). This is revealed by the prices a security seldom moves above (resistance) or

below (support). 

As you can see in Figure 6, support is the price level through which a stock or market

seldom falls (illustrated by the blue arrows). Resistance, on the other hand, is the price

level that a stock or market seldom surpasses (illustrated by the red arrows). 

Why Does it Happen? 

These support and resistance levels are seen as important in terms of market

psychology and supply and demand. Support and resistance levels are the levels at

which a lot of traders are willing to buy the stock (in the case of a support) or sell it (in

the case of resistance). When these trendlines are broken, the supply and demand and

the psychology behind the stock's movements is thought to have shifted, in which case

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new levels of support and resistance will likely be established. 

The Importance of Support and Resistance 

Support and resistance analysis is an important part of trends because it can be used to

make trading decisions and identify when a trend is reversing. For example, if a trader

identifies an important level of resistance that has been tested several times but never

broken, he or she may decide to take profits as the security moves toward this point

because it is unlikely that it will move past this level. 

Support and resistance levels both test and confirm trends and need to be monitored by

anyone who uses technical analysis. As long as the price of the share remains between

these levels of support and resistance, the trend is likely to continue. It is important to

note, however, that a break beyond a level of support or resistance does not always

have to be a reversal. For example, if prices moved above the resistance levels of an

upward trending channel, the trend has accelerated, not reversed. This means that the

price appreciation is expected to be faster than it was in the channel. 

Being aware of these important support and resistance points should affect the way that

you trade a stock. Traders should avoid placing orders at these major points, as the

area around them is usually marked by a lot of volatility. If you feel confident about

making a trade near a support or resistance level, it is important that you follow this

simple rule: do not place orders directly at the support or resistance level. This is

because in many cases, the price never actually reaches the whole number, but flirts

with it instead. So if you're bullish on a stock that is moving toward an important support

level, do not place the trade at the support level. Instead, place it above the support

level, but within a few points. On the other hand, if you are placing stops or short selling,

set up your trade price at or below the level of support. 

Volume

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Volume is the number of shares or contracts traded during a given time frame.

The time frame is usually one day, but can also be a week.The analysis of volume is

basic and essential in technical analysis. Volume provides evidence of intensity with a

given price move. As volume often leads price, it is a valuable indicator, especially for

price peaks.

Volume has two major premises

When Prices rise or fall, an increase in volume is strong confirmation that the rise

or fall in the price is real and the price movement has strength.

When prices rise or fall and there is a decrease in volume, then this is interpreted

as being a weak price move as the price move had very little strength and

interest from traders.

Illustration

a) A-places a buy order for 10 shares of a reliance. The transaction occurs Rs.

10above the CMP. Therefore Rs. 10 price movement had 10shares worth of

interest from a buyer.

b) B- places a buy order for 1000 shares of reliance. This transaction takes place

at a price that is Rs. 10 above the current price.

Both the transaction increased the price by Rs 10 but the second one is more significant

as B is bullish and is taking large positions to prove it where as in the earlier case 10

shares is insignificant. Increase or decrease in prices along with increased volume is a

confirmation of a trend.

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Concept of deliverable volumes :-

Deliverable volumes are the net delivery position out of the total volumes traded in the

day. Higher the percentage of it higher is the confirmation of the price movement in the

direction. Thus, if a peak is broken with good volumes and higher percentage of delivery

then it’s a definite buy signal.

Chart Patterns

A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a

sign of future price movements. Chartists use these patterns to identify current trends

and trend reversals and to trigger buy and sell signals.

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Basically there are two types of chart patterns Reversal and Continuation

Reversal

It is a change in the direction of a price trend. On a price chart, reversals undergo a

recognizable change in the price structure. An uptrend, which is a series of higher highs

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and higher lows, reverses into a downtrend by changing to a series of lower highs and

lower lows. A downtrend, which is a series of lower highs and lower lows, reverses into

an uptrend by changing to a series of higher highs and higher lows.

It also referred to as a "trend reversal", "rally" or "correction".

Head and Shoulders Top

A bearish head & shoulders top is a powerful and reliable reversal pattern that appears

as a large distribution period after a significant uptrend. Its completion signals a trend

reversal. Three successive peaks characterize the pattern with the middle one being the

tallest and the two outside ones being shorter and approximately equal.

The above chart illustrates the sequences of events that unfold as the pattern develops.

The left shoulder is formed as just another peak and correction within a long uptrend.

The stock then rallies and makes another higher high. This action, which forms the left

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shoulder and first half of the head is no different than what is expected with a stock in a

typical uptrend. And at this point in time, there is no way for the trader to know that a

head & shoulders is forming. The stock then begins its usual “pullback within an

uptrend,” but not only does the stock trade below the left shoulder, it falls to, or close to,

the same level as the previous pullback. The head has now been formed. This is the

first sign that the buyers may be getting tired and the stock seems to be losing strength.

A trend line, called the neckline, can be drawn between the two troughs. The stock then

rallies again but is unable to eclipse its previous high. This is the second sign the

uptrend may be nearing an end. A sell-off from this shorter peak (right shoulder) through

the neckline would mark a successful reversal of the uptrend.

The neckline should be flat or slightly upward sloping. Downward sloping necklines do

occasionally occur, but their existence indicates that weakness is slowly working itself

into the stock and a large correction is probably not imminent. In this case, the trader

ought to look elsewhere for trading opportunities.

Breakouts to the downside do not have the same volume or movement requirements as

their bullish counterparts. In fact, when stock breaks support with a massive volume

surge, it often signals that of a capitulation sell-off and the stock rebounds shortly after.

The best downside breaks occur on average volume followed by the stock drifting lower

for a few days on increasing volume. Psychologically, when a stock first breaks support,

stockholders become concerned; many of them show a loss and some sell. As the stock

trades lower, concern becomes fear and the selling accelerates. Then fear becomes

panic, and people sell regardless of price. This is why there typically is a delayed

volume surge with breaks to the downside.

Head & Shoulder Bottom

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Bullish head & shoulders bottoms are powerful and reliable reversal patterns that

appear as large basing periods after a substantial downtrend. Its completion signals a

trend reversal. Three successive troughs characterize the pattern with the middle one

being the

deepest and

the two

outside

ones

being

shallower and approximately equal.

The above chart illustrates the sequence of events that unfold as the pattern develops.

The left shoulder is formed as just another sell-off and bounce within a long downtrend.

The stock then falls and makes another lower low. This action, which forms the left

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shoulder and first half of the head, is no different than what is expected with a stock in a

typical downtrend. And at this point in time, there is no way for the trader to know that a

head & shoulders bottom is forming. The stock then begins its usual “bounce within a

downtrend,” but not only does the stock trade above the left shoulder, it rallies to, or

close to, the same level as the previous bounce. The head has now been formed. This

is the first sign that the selling pressure may be abating and the stock seems to be

gaining strength. A trendline, called the neckline, can be drawn between the two

troughs. The stock then falls again but the imbalance of supply and demand is such that

the stock does not make a lower low. This is the second sign the downtrend may be

nearing an end. A rally from this shallower dip (right shoulder) through the neckline with

a volume surge would mark a successful reversal of the downtrend.

Like all other upside breaks, a surge in volume must accompany the breakout. Failure

to accomplish this doesn't necessarily mean the pattern will be a complete failure, but a

red flag is raised. Remember, a head & shoulders bottom occurs after a weak stock has

been in a long downtrend. There really needs to be a massive amount of buying to

reverse the downtrend.

The character and extent of the expected price movement upon breakage depends on

several factors. Typically it is equal to the distance from the neckline to the extreme

point of the head. But this is just a guideline. Head and shoulders is a reversal pattern,

so there must be a significant move to reverse. A small move into the pattern usually

results in a small rally upon break. Also, the rally tends to be the mirror image of the

preceding drop. This means a quick and violent drop foreshadows a quick rally.

Double Tops and Bottoms

This chart pattern is another well-known pattern that signals a trend reversal - it is

considered to be one of the most reliable and is commonly used. These patterns are

formed after a sustained trend and signal to chartists that the trend is about to reverse.

The pattern is created when a price movement tests support or resistance levels twice

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and is unable to break through. This pattern is often used to signal intermediate and

long-term trend reversals.

In the case of the double top pattern in below chart, the price movement has twice tried

to move above a certain price level. After two unsuccessful attempts at pushing the

price higher, the trend reverses and the price heads lower. In the case of a double

bottom (shown on the right), the price movement has tried to go lower twice, but has

found support each time. After the second bounce off of the support, the security enters

a new trend and heads upward.

Triple Top 

This bearish reversal pattern is formed when a security that is trending upward tests a

similar level of resistance three times without breaking through. Each time the security

tests the resistance level, it falls to a similar area of support. After the third fall to the

support level, the pattern is complete when the security falls through the support; the

price is then expected to move in a downward trend. 

The first step in this pattern is the creation of a new high in an uptrend that is stalled by

selling pressure, which forms a level of resistance. The selling pressure causes the

price to fall until it finds a level of support, as buyers move back into the security. The

buying pressure sends the price back up to the area of resistance the security

previously met. Again, the sellers enter the market and send the security back down to

the support level. 

This up-and-down movement is repeated for the third time; but this time the buyers,

after failing three times, give up on the security, and the sellers take over. Upon falling

through the level of support, the security is expected to

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trend downward. 

This pattern can be difficult to spot in the early stages as it will initially look like

a double-top pattern, which was discussed in a previous section. The most important

thing here is that one waits for the price to move past the level of resistance before

entering the security, as the security could actually just end up being range-bound,

where it trades between the two levels for

sometime. 

In the triple-top formation, each test of resistance at the upper end should be marked

with declining volume at each successive peak. And again, when the price breaks below

the support level, it should be accompanied by high volume. 

Once the signal is formed, the price objective is based on the size of the chart pattern or

the price distance between the level of resistance and support.

Triple Bottom  

This bullish reversal pattern has all of the same attributes as the triple top but signals a

reversal of a downward trend. The triple-bottom pattern illustrates a security that is

trading in a downtrend and attempts to fall through a level of support three times, each

time moving back to a level of resistance. After the third attempt to push the price lower,

the pattern is complete when the price moves above the resistance level and begins

trading in an upward trend. 

This pattern begins by setting a new low in a downtrend, which is followed by a rally to a

high. This sets up the range of trading for the triple-bottom pattern. After hitting the high,

the price again comes under selling pressure, which sends it back down to the previous

low. Buyers again move back into the security at this support level, sending the price

back up again, usually to

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the previous high. 

This is repeated a third time, but after failing again to move to a new low, the pattern is

complete when the security moves above the resistance level to

begin trading in an uptrend. 

In this pattern, volume plays a role similar to the triple top, declining at each trough as it

tests the support level, which is a sign of diminishing selling pressure. Again, volume

should be high on a breakout above the resistance level on the completion of the

pattern. 

The price objective will also initially be calculated as the distance of the chart pattern

added to the price breakout.

Rounding Bottoms

A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern

that signals a shift from a downtrend to an uptrend. This pattern is traditionally thought

to last anywhere from several months to several years. Due to the long-term look of

these patterns and their components, the signal and construct of these patterns are

more difficult to identify than other reversal patterns. 

The pattern should be preceded by a downtrend but will sometimes be preceded by a

sideways price movement that formed after a downward trend. The start of the rounding

bottom (its left side) is usually caused by a peak in the downward trend followed by a

long price descent to a new long-term low. 

The time distance from the initial peak to the long-term low is considered to be half the

distance of the rounding bottom. This helps to give chartists an idea to as to how long

the chart pattern will last or when the pattern is expected to be complete, with a

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breakout to the upside. For example, if the first half of the pattern is one year, then the

signal will not be formed until around a year later. 

Volume is one of the most important confirming measures for this pattern where volume

should be high at the initial peak (or start of the pattern) and weaken as the price

movement heads toward the low. As the price moves away from the low to the price

level set by the initial peak, volume should be rising. 

Breakouts in chart patterns should be accompanied by a large increase in volume,

which helps to strengthen the signal formed by the breakout. Once the price moves

above the peak that was established at the start of the chart pattern, the downward

trend is considered to have reversed and a buy signal

is formed. 

Rounding Top

A Rounded Top is considered a bearish signal, indicating a possible reversal of the

current uptrend to a new downtrend.

A Rounded Top is dome-shaped, and is sometimes referred to as an inverted bowl or a

saucer top. The pattern is confirmed when the price breaks down below its moving

average.

Volume

Volume can fluctuate, however volume generally appears to be concave, and follows

the inverse of the price pattern. Therefore, as the price begins to ascend, volume tends

to decrease. Once the top of the price pattern starts its downward turn, volume tends to

increase.

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Duration of the Rounded Top

Rounded Tops typically occur over a period of about 3 weeks, but can also be observed

over several years.

Target Price

After a downside breakout, technical analysts may use the starting price at

Continuation

A technical analysis pattern that suggests a trend is exhibiting a temporary diversion in

behaviour, and will eventually continue on its existing trend. The symmetrical triangle

charts displayed below are both exhibiting a continuation pattern. Notice how the chart

extends above (below) its existing pattern.

Bullish symmetrical triangles

Bullish symmetrical triangles represent neutral periods of doubt and indecision. They

are characterized by a series of higher lows and lower highs as the forces of supply and

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demand are nearly equal. Each rally is seen as a selling opportunity while each dip is

met with buying. The pattern is typically large and takes several months or more than a

year to form.

Bullish symmetrical triangles appear in uptrends and typically resolve themselves to the

upside. Breakouts to the upside must be accompanied by a significant increase in

volume to confirm the breakout. Failure to accomplish this doesn't automatically render

the play invalid, but it does raise a yellow flag. Besides volume, the astute trader ought

to look for a close above the most recent high. This price represents the previous area

of selling pressure and an area where stockholders may be looking to “get out even.” It

is recommended that if volume does not accompany the break, and if the stock fails to

make a higher high within a reasonable amount of time, the trader should move a sell

stop up to protect profits.

The expected price movement upon breakout is approximately equal to the widest part

of the pattern.

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Bearish symmetrical triangles

Bearish symmetrical triangles represent neutral periods of doubt and indecision. They

are characterized by a series of higher lows and lower highs as the forces of supply and

demand are nearly equal. Each rally is seen as a selling opportunity while each dip is

met with buying. The pattern is typically large and takes several months or more than a

year to form.

Bearish symmetrical triangles appear in downtrends and typically resolve themselves to

the downside. Breakdowns do not have the same volume or movement requirements as

their opposite upside breaks. In fact, when stock breaks support with a massive volume

surge, it often signals that of a capitulation sell-off and the stock rebounds shortly after.

The best downside breaks occur on average volume followed by the stock drifting lower

for a few days on increasing volume. Psychologically, when a stock first breaks support,

stockholders become concerned; many of them show a loss and some sell. As the stock

trades lower, concern becomes fear and the selling accelerates. Then fear becomes

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panic, and people sell regardless of price. This is why there typically is a delayed

volume surge with breaks to the downside.

The expected price movement upon breakout is approximately equal to the widest part

of the pattern.

Ascending Triangles

Ascending triangles form in uptrends and characterized by a series of higher lows but

the same highs. They have a definite bullish bias and typically form in 2 to 8 weeks.

It is as if a massive sell order has been placed at the upper trend line and even though

the stock is strong and in an uptrend, it takes some time to fully execute the order.

Volume usually diminishes as the pattern develops. Once the overhead supply is

absorbed, the stock is free to catapult higher because the lack of supply shifts the

supply/demand imbalance to favor the buyers. Also, if indeed a stock is in a steady

uptrend, every stockholder who bought in the prior several months will be showing a

gain. Satisfied and happy stockholders rarely sell. This reality also helps to push the

stock higher after the break.

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Bearish symmetrical triangles

Breakouts should be accompanied by a significant increase in volume. Failure to

accomplish this doesn't render the breakout invalid, but a red flag is raised and

appropriate stops should be employed.

There are two guidelines a trader can use to determine the extent of the rally upon

breakout. The first expected price movement is approximately equal to the widest part

of the pattern. The second price target is equal to the rally into the pattern. The extent of

the advance will often depend on the overall market. A strong market will help greatly in

achieving the more ambitious price target, but in a weak market, a trader should be

happy with just a moderate advance.

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Descending Triangles

Descending triangles form in downtrends and are characterized by a series of lower

highs but the same lows. They have a definite bearish bias and typically form in 2 to 8

weeks.

It is as if a massive buy order has been placed at the lower trendline, and even though

the stock is weak and in a downtrend, it takes some time to fully executes the order.

Volume usually diminishes as the pattern develops. Once the underneath demand is

absorbed, a big drop in the stock can occur because the lack of demand shifts the

supply/demand imbalance to favour the sellers. Also, given this is a weak stock in a

steady downtrend, when support is broken, every stockholder who recently established

a long position in the prior several months shows a loss. So besides the large buy order

being absorbed, fear now sets in and adds to the downward pressure.

Like symmetrical triangles, downside breaks do not have strict volume requirements.

The best downside breaks occur on average volume followed by the stock drifting lower

for a few days. Volume then ramps up as traders throw in the towel, and the stock

crashes.

There are two guidelines a trader can use to determine the extent of the fall after the

break. The first expected price movement is approximately equal to the widest part of

the pattern. The second price target is equal to the price movement into the pattern. The

drop will often depend on the overall market. A weak market will help push the stock

lower, but a strong market may slow or stop the descent.

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Bullish flags

Bullish flags are small continuation patterns that represent brief pauses within an

already existing uptrend. They appear flat or trade with a slight downward slant and

typically occur in the middle of a large rally or immediately after a stock has broken out

of a basing period.

The slight short-term downtrend against the overall uptrend is very healthy as it

functions to scare off weak and emotional long positions that would otherwise slow the

movement after the breakout. These longs would sell at the first sign of strength. But

instead, as the stock slowly trends down, these weak stockholders sell their positions.

Once enough have sold, the overhead resistance in essence is cleared and the stock

can continue its ride up.

Whether a bullish flag pattern appears during a large rally or after breaking out of a

consolidation period, the expected price movement upon breakout is approximately

equal to the preceding move into the flag.

It is important to emphasize that for a bullish flag to truly posses great potential, it must

have been preceded by a significant move on heavy volume. Like pennants, bullish

flags tend to be symmetrical in that the stock movement after the breakout often mirrors

the move into the pattern.

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Bearish flags

Bearish flags are small continuation patterns that represent brief pauses within an

already existing downtrend. They appear flat or trade with a slight upward slant and

occur in the middle of a large drop or immediately after a stock has broken down from a

substantial rally.

The slight short-term uptrend against the overall downtrend is very healthy and has

serves two functions.

Weak shorts that were hoping to take profits at a lower price get scared and cover their

positions. This covering is partially responsible for the short-term upward slant. Once

enough have covered, the underneath support in essence is lessened.

The slight uptrend also indicates that the lay public is being “suckered into” the stock as

they buy what they believe to be a cheap stock.

When the buying from the lay public dries up and the weak shorts finish covering,

support disappears, and the stock continues it downward movement.

Whether a bearish flag pattern appears during a large fall or after breaking down from a

distribution period, the expected price movement upon breakout is approximately equal

to the preceding move into the flag.

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Pennants

Pennants are small continuation patterns that represent brief pauses within an already

existing trend. They are characterized by converging trendlines and have a definite

bullish or bearish bias depending on the overall trend.

Bullish breakouts should be accompanied by a significant increase in volume with

appropriate stopsloss used if this is not seen.

Downside breaks do not have the same volume requirement as their bullish

counterparts. Like other bearish breaks, there often is a delayed volume surge.

The price action prior to a wedge formation can be used as a guide in predicting the

price movement upon breakout. So, for a bullish wedge in an uptrend to truly possess

great potential, it must have been preceded by a significant move (i.e. if the movement

into the pattern was quick and full of energy, the rally after the breakout most likely will

be quick and full of energy).

The expected price movement upon breakout is approximately equal to the distance of

the move into the pattern.

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Gaps

A gap in a chart is an empty space between a trading period and the following trading

period. This occurs when there is a large difference in prices between two sequential

trading periods. For example, if the trading range in one period is between 625 and 640

and the next trading period opens at 650, there will be a large gap on the chart between

these two periods. Gap price movements can be found on bar charts and candlestick

charts but will not be found on point and figure or basic line charts. Gaps generally show

that something of significance has happened in the security, such as a better-than-

expected earnings announcement.

There are main types of Gaps :

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Bullish Candlestick Patterns

55

56

Engulfing

Morning Star

Hammer

Three White Soldiers

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58

Bearish Candlestick Patterns

59

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DOJI

Doji candlesticks have the same open and close price or at least their bodies are

extremely short. A doji should have a very small body that appears as a thin line.

Doji candles suggest indecision or a struggle for turf positioning between buyers and

sellers. Prices move above and below the open price during the session, but close at or

very near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a

draw.

There are four special types of Doji candlesticks

Moving Averages

An indicator frequently used in technical analysis showing the average value of a

security's price over a set period. Moving averages are generally used to measure

momentum and define areas of possible support and resistance.

Types of Moving Averages

There are a number of different types of moving averages that vary in the way they are

calculated, but how each average is interpreted remains the same. The calculations

only differ in regards to the weighting that they place on the price data, shifting from

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equal weighting of each price point to more weight being placed on recent data. The

three most common types of moving averages are simple, linear and exponential.

Simple Moving Average (SMA)

This is the most common method used to calculate the moving average of prices. It

simply takes the sum of all of the past closing prices over the time period and divides

the result by the number of prices used in the calculation. For example, in a 10-day

moving average, the last 10 closing prices are added together and then divided by 10.

As you can see in Figure 1, a trader is able to make the average less responsive to

changing prices by increasing the number of periods used in the calculation. Increasing

the number of time periods in the calculation is one of the best ways to gauge the

strength of the long-term trend and the likelihood that it will reverse.

Many individuals argue that the usefulness of this type of average is limited because

each point in the data series has the same impact on the result regardless of where it

occurs in the sequence. The critics argue that the most recent data is more important

and, therefore, it should also have a higher weighting. This type of criticism has been

one of the main factors leading to the invention of other forms of moving averages.

Bollinger Bands

Developed by John Bollinger, Bollinger Bands  are volatility bands placed above and

below a moving average. Volatility is based on the standard deviation, which changes a

volatility increase and decreases. The bands automatically widen when volatility

increases and narrow when volatility decreases. This dynamic nature

of Bollinger Bands also means they can be used on different securities with the

standard settings.

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Middle Band = 20-day simple moving average (SMA)

Upper Band = 20-day SMA + (20-day standard deviation of price x 2)

Lower Band = 20-day SMA - (20-day standard deviation of price x 2)

Bollinger Bands consist of a middle band with two outer bands. The middle band is

a simple moving average that is usually set at 20 periods. A simple moving average is

used because a simple moving average is also used in the standard deviation formula.

The look-back period for the standard deviation is the same as for the simple moving

average. The outer bands are usually set 2 standard deviations above and below the

middle band.

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Indicators and Oscillators

Indicator

Statistics used to measure current conditions as well as to forecast financial or

economic trends. Indicators are used extensively in technical analysis to predict

changes in stock trends or price patterns. In fundamental analysis, economic indicators

that quantify current economic and industry conditions are used to provide insight into

the future profitability potential of public companies

Oscillator

It is a technical analysis tool that is banded between two extreme values and built with

the results from a trend indicator for discovering short-term overbought or oversold

conditions. As the value of the oscillator approaches the upper extreme value the asset

is deemed to be overbought, and as it approaches the lower extreme it is deemed to be

oversold.

Moving Average Convergence

The moving average convergence divergence (MACD) is one of the most well-known

and used indicators in technical analysis. This indicator is comprised of two exponential

moving averages, which help to measure momentum in the security. The MACD is

simply the difference between these two moving averages plotted against a centerline.

The centerline is the point at which the two moving averages are equal. Along with the

MACD and the centerline, an exponential moving average of the MACD itself is plotted

on the chart. The idea behind this momentum indicator is to measure short-term

momentum compared to longer term momentum to help signal the current direction of

momentum.

MACD= shorter term moving average - longer term moving average

When the MACD is positive, it signals that the shorter term moving average is above the

longer term moving average and suggests upward momentum. The opposite holds true

when the MACD is negative - this signals that the shorter term is below the longer and

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suggest downward momentum. When the MACD line crosses over the centerline, it

signals a crossing in the moving averages. The most common moving average values

used in the calculation are the 26-day and 12-day exponential moving averages. The

signal line is commonly created by using a nine-day exponential moving average of the

MACD values. These values can be adjusted to meet the needs of the technician and

the security. For more volatile securities, shorter term averages are used while less

volatile securities should have longer averages.

As you can see in Figure 2, one of the most common buy signals is generated when the

MACD crosses above the signal line (blue dotted line), while sell signals often occur

when the MACD crosses below the signal.

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Pharmaceuticals Sector Analysis Report (AS ON 9/9/2012)

The Indian Pharmaceutical industry is highly fragmented with about 24,000 players (around 330 in the organised sector). The top ten companies make up for more than a third of the market. The Indian pharma industry grew by a robust 18% YoY in 2011 to ` 565 bn (approx. US$ 12.5 bn). It accounts for about 1.4% of the world's pharma industry in value terms and 10% in volume terms.

Besides the domestic market, Indian pharma companies also have a large chunk of their revenues coming from exports. While some are focusing on the generics market in the US, Europe and semi-regulated markets, others are focusing on custom manufacturing for innovator companies. Biopharmaceuticals is also increasingly becoming an area of interest given the complexity in manufacture and limited competition.

The drug price control order (DPCO) continues to be a menace for the industry. There are three tiers of regulations - on bulk drugs, on formulations and on overall profitability. This has made the profitability of the sector susceptible to the whims and fancies of the pricing authority. The new Pharmaceutical Policy 2006, which proposes to bring 354 essential drugs under price control has not been officially passed as yet and has been stiffly opposed by the pharmaceutical industry.

The R&D spends of the top five companies is about 5% to 10% of revenues. This ratio is still way below the global average of 15% to 20% of sales. Indian companies have adopted various strategies for their R&D efforts. Some have entered into collaboration and partnership agreements with innovator companies; others have out-licensed their molecules for milestone payments. Hiving off R&D units into separate companies has also become a preferred option for many Indian pharma players. That said, given that the research pipelines of Big Pharma are drying up, they have now begun to dabble in generics. In this regard, these innovator companies are either buying out Indian firms or are forging alliances with them.

KEY POINTS

Supply Higher for traditional therapeutic segments, which is typical of a developing market. Relatively lower for lifestyle segment.

Demand Very high for certain therapeutic segments. Will change as life expectancy, literacy increases.

Barriers to entry Licensing, distribution network, patents, plant approval by

66

regulatory authority.

Bargaining power of suppliers

Distributors are increasingly pushing generic products in a bid to earn higher margins.

Bargaining power of customers

High, a fragmented industry has ensured that there is widespread competition in almost all product segments. (Currently also protected by the DPCO).

Competition High. Very fragmented industry with the top 300 (of 24,000 manufacturing units) players accounting for 85% of sales value. Consolidation is likely to intensify.

The Healthcare index is showing Higher Top and Higher Bottom i.e.bullish trend in the long term chart where the price of index comes up from 6463.09 to 6969.89.Also, on MACD as well a positive breakout was given. High weightage stocks of the sector like SUNPHARMA, DR.REDDY, CIPLA, LUPIN.

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SUNPHARMA

SUNPHARMA CMP :- 625.25

Long term pattern on chart is bullish. Whereas near term pattern on chart is range bound. A strong support is at 612.65 and stiff resistance is 639.9. Any trade closes above / below would add trigger in the direction. Hence traders are advised to watch this stock closely.

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DR.REDDY

DR.REDDY CMP :- 1646.60

The stock has a bearish pattern on charts but near term trend is rangebound between

1600 – 1683.40. The stock has resistance at 1683.40 & support at 1609.45. Traders

should look at these levels as any above/ below would add trigger direction for stock on

charts.

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CIPLA

CIPLA CMP :- 322.35

Near term trend is in a bullish phase. Best trading strategy would be to buy at dips with a strict stoploss of 314.40. The technical oscillators also have confirmed the signal of buy.

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LUPIN

LUPIN CMP :- 544.65

Near term pattern on chart is bullish. Whereas near term pattern on chart is range bound. A strong support is at 536 and stiff resistance is 556.60. Any trade closes above / below would add trigger in the direction. Hence traders are advised to watch this stock closely.

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Prospects

The product patents regime heralds an era of innovation and research resulting in the launch of new patented product launches. In the longer run, domestic companies would face fresh competition from MNCs, as they would make aggressive new launches. However, the latter would most likely be subject to price negotiation.

Drugs having estimated sales of over US$ 100 bn are expected to go off patent between CY10 and CY14. With the governments in the developed markets looking to cut down healthcare costs by facilitating a speedy introduction of generic drugs into the market, domestic pharma companies will stand to benefit. However, despite this huge promise, intense competition and consequent price erosion would continue to remain a cause for concern.

The life style segments such as cardiovascular, anti-diabetes, anti-depressants and anti-cancers will continue to be lucrative and fast growing owing to increased urbanisation and change in lifestyle patterns. High growth in domestic sales in the future will depend on the ability of companies to align their product portfolio towards the chronic segment as the lifestyle diseases like hypertension, congestive heart failure, depression, asthma, and diabetes are on the rise.

Contract manufacturing and research (CRAMS) is expected to gain momentum going forward. India's competitive strengths in research services include English-language competency, availability of low cost skilled doctors and scientists, large patient population with diverse disease characteristics and adherence to international quality standards. As for contract manufacturing, both global innovators and generic majors are finding it profitable to outsource production. Although the scenario has yet not improved for this space after the financial crisis, it is expected to improve going forward as the pressure to prune costs increases.

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Conclusion

If you'd like to make profits in up markets, make profits in down markets and put these profits in your trading account over short periods of time, then the technique which can make this happen is Technical Analysis.

Emotions can whipsaw a trader until all reason is lost, and buy and sell orders are made without a sound basis. This does not have to happen. Find stocks that are in position where big gains can be made, either up or down; in relatively short periods of time. We can apply detailed technical analysis to determine if it is time to be bullish or bearish. We can see whether a stock is overbought, oversold, basing, breaking out or breaking down. If you want to make money irrespective of whichever way the market goes-the key is doing the homework to determine what move is the right one so you can enter a trade with confidence and without hesitation, and exit with the same precision.

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BIBLIOGRAPHY

WWW.CHARTING.BSEINDIA.COM

WWW.MONEYCONTROL.COM

WWW.NSEINDIA.COM

WWW.BSEINDIA.COM

WWW.SATCODIRECT.COM

WWW.NSETODAY.COM

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