Use of Technical Indicators

Bollinger Band Analysis: Bollinger Bands are curves drawn in and around the price structure that define high and low on a relative basis. The base of the bands is a simple moving average. A measure of volatility, standard deviation, is used to set the width of the bands making them fully adaptive to changing market conditions. The defaults are bands spread above and below a 20-day simple moving average by two standard deviations. The purpose of Bollinger Bands is to provide a relative definition of high and low. By definition, prices are high at the upper band and low at the lower band. This definition can aid in rigorous pattern recognition and is useful in comparing price action to the action of indicators to arrive at systematic trading decisions. The following graph shows the share price movement of HUL from April. 29, 2005 to October 29, 2010.

Source: Moneycontrol.com

The scrip has shown a very interesting movement right from the beginning of the graph. Whenever the scrip has touched the upper Band, it has shown downward movement and whenever the scrip has touched the lower Band, it has shown upward movement in most of the cases; though the duration of the movement has been varying over the period of time. And, as you can see that in the beginning of the year 2006 there is a stagnant upward movement. Also, there is one more thing to note in this graph is that the movement of the scrip (either way) is not very sharp whenever it touches either of the two Bands when there is a wide gap between the two bands. This is quite significant pattern and going by this historical evidence, it is looking quite probable that the scrip is poised to show a downward correction in its price as the Bands are closing at the rightmost end of the graph and the scrip has already touched the upper Band. The downward movement might not be too much because the Gap between the two bands is relatively narrower. But the scrip, most probably, is going to shed some points in the coming days.

MACD Analysis: Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The default MACD is represented as the difference between a 26-day and 12-day EMA of the price. A 9-day EMA of the MACD, referred to as the signal (or trigger) line, is plotted on top of the MACD to indicate buy/sell opportunities. Divergence, the difference between the MACD and the signal, is also plotted as a histogram. The MACD is most effective in wide-swinging trading markets. In the given figure, the Red Line the Signal or Trigger Line while the Blue Line indicates the MACD line in the lower panel of the Graph.

Going by the basic MACD trading rule, one can easily make out form this graph that the indicator is giving the sell signal to the investor. The scrip has responded according to the movement of Signal Line that means whenever the MACD falls below signal line, the scrip has sown downward movement and vice-versa. This time too, the MACD line has fallen below the Signal Line (see the rightmost part in the lower panel of the graph) and this indicates a future downward correction in the price of the scrip.

Relative Strength Index (RSI): The Relative Strength Index (RSI) measures the price of a security against its past performance in order to determine its internal strength (in an attempt to quantify the securitys price momentum). When Wilder introduced the Relative Strength Index, he recommended using a 14day Relative Strength Index. Since then, the 9-day and 25-day Relative Strength Indexes have

also gained popularity. The Relative Strength Index is a price-following oscillator that ranges between 0 and 100.

The scrip has got a history of trading in the range of 30 to 75 (RSI) for the last five years and it has corrected itself each time the movement is beyond 75 or below 30. This time too when the scrip crossed the upper boundary of 75 on RSI this september, it corrected its upward movement and finally the movement is settled around 50 on RSI. Therefore, the scrip will move up after a bit of correction in the coming weeks.