DAY ADVANCES DECLINES A–D ABI AD Ratio AD Line

1 900 100 800 800 9 900

2 300 700 -400 400 3/7 500
3 400 600 -200 200 4/6 300
4 350 650 -300 300 3.5/6.5 0
5 750 250 500 500 3 500
6 650 350 300 300 6.5/3.5 800

GENERAL SENTIMENTS
VOLUME AND BREADTH
GENERAL SENTIMENTS
MARKET-WIDE INDICATORS
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 1
 RULES OF VOLUME
Price information is combined with the
data on volume traded.
Volume contains important clues.
Belief: Volume tends to lead the price.
Normal Rule
In Bull Market
 Volume increases with price rise
 Volume decreases with price fall
In Bear Market
 Volume increases with price fall
 Volume decreases with price rise

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 2

RULES OF VOLUME
▪ If volume increases as price
drops: indicates
drying up of supply,
Rise in price expected.
▪ If volume decreases as price
rises: indicates
drying up of demand,
Fall in price expected.
RAJIV SRIVASTAVA
Charles Ying’s Empirical Study:
1. Small volume is accompanied with fall in price
2. Large volume is accompanied with rise in
price.
3. Large increase in volume is accompanied by
large increase or large decrease in price.
4. Large volume is followed by rise in price.
5. Decline in volume for 5 consecutive days,
leads to price fall for next 4 days.
6. Rise in volume for 5 consecutive days, leads to
price rise for next 4 days
TECHNICAL ANALYSIS 3
 VOLUME
TREND CONTINUATION & TREND REVERSAL
Volume represents intensity of trend. Rising volumes represents continued interest in the
present trend, and therefore continuation of trend. When volume dries up it would represent
lack of interest in the present trend. It would be an impending sign of trend reversal.

Falling volume with

Falling volume with falling prices
Rising volume with Rising volume with rising prices
rising prices falling prices Bear Reversal
Bull Reversal
Bullish Bearish Sign of weakening of Sign of weakening of
Bullish trend would bearish trend,
Bearish trend would bullish trend, Exhaustion Exhaustion
continue continue by bulls, Lower buying by bears,
interest at higher prices Lower selling interest
at lower prices.

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 4

VOLUME AND PRICE
ARMS INDEX (TRading INdex;TRIN)
Developed by Richard Arms in 1967. Also called TRIN
(TRading INdex).
Compares price and volume together to understand
whether increased volume is flowing to bulls or bears.
Advancing Shares
Declining Shares
Arms Index =
Advancing Volume
Declining Volume

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 5

ARMS INDEX - INTERPRETATION
Arms Index would indicate following
▪ More number of shares Less than 1.0 : Bullish
advancing than declining is Greater than 1.0 : Bearish
AD Ratio is greater than 1.0. Close to 1.0 : Neutral

▪ More volume flowing into
advancing issues than into
declining issues TRIN too
would be greater than 1.0.
RAJIV SRIVASTAVA
More often used as indicator of overbought and
oversold positions. These positions are upside down.
Lower values indicate OVERBOUGHT positions and
higher values suggest OVERSOLD positions.
When overbought : SELL
When oversold : BUY
TECHNICAL ANALYSIS 6
ARMS INDEX - INTERPRETATION
Arms Index is normally used with moving average to have
smoothed and correct interpretation.
The suggested levels of overbought and oversold positions
and the type of average are as follows:
Moving Forecast Overbought Oversold
Average Horizon (less than) (More than)
4-day Short Term 0.70 1.25
21-day Medium Term 0.85 1.10
55-day Long Term 0.90 1.05
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 7
PITFALLS WITH ARMS INDEX
▪ Rising volume with rising prices is associated with bull
sentiments. If double the number of shares rose with
double the volume, then the shares that fell, the value
of TRIN would be 1.00 indicating neutrality.
▪ If advance decline ratio is 3:1 and volume is 2:1 TRIN is
1.5. It indicates bearish sentiments contrary to general
trend.
▪ Need to be careful with interpretation of TRIN.
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 8
ACCUMULATION AND DISTRIBUTION
▪ If price closes above the midpoint of High and Low
{(H+L)/2} then there is accumulation. Closer the closing
price to High greater is the accumulation.
▪ Advance if accompanied by rising volume then the
sentiments are deeper. Declines are accompanied by lower
volumes. Accumulation Distribution Line
(C − L) − (H − C)
Accumulation Distribution Line =  H−L
x Volume

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 9

ACCUMULATION AND DISTRIBUTION
▪ If Accumulation Distribution Line
moves up Security is being accumulated;
most volume is associated with upward price movement.

moves down Security is being distributed.

▪ Closer is the closing price to High more volume is added.

▪ Closer is the closing price to Low more volume is subtracted.
▪ If exactly midway no change would take place in AD Line.

▪ By volume one can monitor the flow of volume into or out of market.
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 10
CHAIKIN’S MONEY FLOW
▪ Chaikin Money Flow compares the closing price to the daily High-Low
Range to determine how much volume is flowing into or out of the
security, and then compare the result with the total volume.
(C − L) − (H − C)
Accumulation/Distribution Line
 H−L
x Volume
Chaikin Money Flow = =
Volume
 Volume
▪ Divergence between Chaikin Money Flow and price indicates reversal.

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 11

CHAIKIN’S OSCILLATOR
Divergence (Acc/Dist moving up and price falling or vice-
versa) is indicative of reversal.
BUY Stock above 90-day MA and Chaikin
▪ Chaikin Oscillator is the Oscillator turns up from negative to positive
difference of EMAs of
Accumulation Distribution NO SIGNAL Stock below 90-day MA and Chaikin
Line. Oscillator turns up from negative to positive:
▪ Chaikin Oscillator = SELL Stock below 90-day MA and Chaikin
(3-day EMA – 10-day Oscillator turns up from positive to negative
EMA) of AD Line. NO SIGNAL Stock above 90-day MA and Chaikin
Oscillator turns up from positive to negative:

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 12

BREADTH OF THE MARKET
▪ Averages may behave contrary to the total market.
▪ How disperse (wide-spread) are the conditions are indicated in the
nos. of shares gaining (Advancing) and nos. of shares losing
(Declining).
▪ Indices reflects trends and Breadth reflects extent of trend (how
widespread is the sentiment).
▪ Breadth of the market is measured by difference between nos. of
shares advanced and declined on a day.

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 13

BREADTH INDICATORS
Absolute Breadth Index, (ABI)
▪ An indicator of market ▪ Advance Decline Ratio, (AD Ratio)
momentum developed by AD Ratio = Advances/Declines
Norman Fosback. ▪ Rules
▪ It emphasizes the magnitude Greater than 1.25 : Overbought
of change but ignores region: SELL
direction of change. Less than 0.9: Oversold
▪ ABI = Absolute value of region: BUY
(Advances – Declines)

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 14

 BREADTH OF THE MARKET – AD LINE
Day Adv. Dec. Cum A - D
Day 1 900 600 300
Day 2 700 800 200
Day 3 600 900 -100

RULE: When there is divergence in Averages and AD Line, AD line shows

truer direction. Averages can not defy the total sentiments for long.
Breadth Index Signals
New Low At Peak Onset of Bear Phase
New High At Trough Onset of Bull Phase
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 15
 BREADTH INDICATORS – AD LINE
When more stocks are rising than declining AD line goes up.
Generally,
Averages and AD line will move in tandem.
Divergence between the two signals trend reversal.
Divergence
BUY: AD Line flattens at the bottom when index is still making a new low.
SELL: AD Line flattens at the top when index is still making a new high

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 16

BREADTH INDICATORS - CALCULATION

DAY ADVANCES DECLINES A–D ABI AD Ratio AD Line

1 900 100 800 800 9 900
2 300 700 -400 400 3/7 500
3 400 600 -200 200 4/6 300
4 350 650 -300 300 3.5/6.5 0
5 750 250 500 500 3 500
6 650 350 300 300 6.5/3.5 800
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 17
McCLELLAN OSCILLATOR
▪ Breadth oscillator developed by Sherman and Marian McClellan.
▪ A bull market is characterized by majority of stocks moving up though
the quantum of movement may be small.
▪ Large number of stocks showing small moves up adds to the value of
index if it is broad based.
▪ Small number of stocks showing large up movements could be
misleading.
▪ Reverse would happen in the bear market.

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 18

McCLELLAN OSCILLATOR - CALCULATION

McClellan Oscillator is the difference of 10% and 5% EMA of AD.

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 19

McCLELLAN OSCILLATOR - RULES
More Than 100: McClellan Oscillator
Extremely Overbought
100 EXTREME
Between 70 and 100:
Overbought OVERBOUGHT
70
Between +70 and -70:
Normal Range NORMAL
0
Between – 70 and -100:
Oversold -70
Less than – 100: OVERSOLD
-100
Extremely Oversold EXTREME

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 20

PUT CALL RATIO
▪ Put Call Ratio is the ratio of positions in put options to those of call
options.
▪ Put protects from fall in the prices, and is bought when decline in
market is expected.
▪ Call is profitable when market rises, and is bought when rise in
market is expected.
▪ When bullish one buys a call option and when bearish one buys a
put option.

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 21

PUT CALL RATIO - CALCULATION
▪ Calculated at the end of the day.
▪ Based on trading volume
▪ Not used much, except by day-traders.
▪ Based on open interest
▪ Ratio of open interest of put options to those of call options

RAJIV SRIVASTAVA TECHNICAL ANALYSIS 22

PUT CALL RATIO - RULES
▪ When bearish sentiments dominate number of puts are larger than
number of calls. Increasing PCR indicates continuation of bearish
sentiments.
▪ When bullish sentiments dominate number of calls are larger than number of puts.
Decreasing PCR indicates continuation of bullish sentiments.
▪ Normal range of PCR is from 0.8 to 1.8.
CAUTION:
▪ If PCR is too high indicating bearish sentiments, may give a contrarian view that
market is oversold and hence an opportune time to buy.
▪ PCR is also not trusted by many as position in options can be considered as
hedging needs and need not reflect the speculative sentiments.
RAJIV SRIVASTAVA TECHNICAL ANALYSIS 23
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