Unit 2: Fundamental and technical analysis

• Intrinsic value is the true or fundamental value of a share based on its expected cash flows, growth and risk — independent of the current market price.
• Decision rule: market price below intrinsic value → undervalued (buy); above → overvalued (sell).

Economic analysis

• Key variables: GDP growth, inflation, interest rates, fiscal deficit, balance of payments, exchange rate, monsoon (for India), industrial production (IIP), corporate earnings outlook, political stability.
• Leading, coincident and lagging indicators of the business cycle.

Industry analysis

• Industry life cycle: pioneering, expansion (growth), stabilisation (maturity), decline.
• Factors: demand and growth, cost structure, competition (Porter's Five Forces), government policy, technology, labour, raw materials, cyclicality.
• Classification: growth (renewables, EVs), cyclical (auto, metals), defensive (FMCG, pharma), sunset industries.

• Qualitative: management quality and governance, competitive advantage (moat), brand, business model, promoter holding and pledging.
• Quantitative: financial statement analysis and ratios.

Technical analysis studies past prices and volumes to forecast future price movements. Assumptions (Dow Theory roots): market action discounts everything; prices move in trends; history repeats.

• Moving average crossover: short-term MA crossing above long-term MA (golden cross) — buy; below (death cross) — sell.
• RSI: above 70 overbought, below 30 oversold.
• Volume confirms price trends.

Dow theory in detail

• Developed from Charles Dow's editorials (1900s): primary trend (bull or bear, months to years), secondary reactions (weeks to months, retracing one-third to two-thirds), minor movements (days).
• Phases of a bull market: accumulation, public participation (mark-up), distribution; trends confirmed when industrial and transport averages agree; volume confirms the trend.
• Bull market: rising prices, higher highs and higher lows, optimism. Bear market: a fall of 20% or more from a peak, lower highs and lower lows, pessimism.

• Bar chart: each period shown by a vertical line from low to high with a tick for the close (open on the left); reveals trends, support, resistance and patterns.
• Candlestick chart: body shows open–close range (green/white up, red/black down); patterns — doji, hammer, engulfing.
• Point-and-figure chart: plots only significant price changes — X for rises and O for falls in columns; ignores time and small moves; a column changes after a reversal of a set number of boxes (three-box reversal common); used to identify breakouts and price targets.

• Trend line: a straight line joining successive lows (uptrend) or highs (downtrend); the more touches, the stronger the line. A decisive break signals a possible trend reversal.
• Channels: parallel lines containing price movement.
• Support: a price level where buying interest halts a fall. Resistance: a level where selling halts a rise.
• Role reversal: once resistance is broken it often becomes support, and vice versa.

• Contrary opinion theory: when the majority (especially small investors) are extremely bullish, it is time to sell, and vice versa.

• Signals: price crossing above its moving average — bullish; below — bearish. Golden cross: 50-day MA crosses above 200-day MA; death cross: crosses below.
• MACD: difference between 12-day and 26-day EMAs, with a 9-day signal line.
• Limitation: moving averages lag prices and give false signals in sideways markets.