Technical Analysis: Chart Types, Dow Theory & Market Trends – NISM Short Notes
This is Part 16 of the NISM short notes series on PassNISM. In this post, we cover the foundations of technical analysis — a major topic in the NISM Series VIII Equity Derivatives exam and the NISM Research Analyst certification.
We explain the core philosophy of technical analysis, compare it with fundamental analysis, walk through all major chart types, and break down the Dow Theory and the three types of market trends.
What Is Technical Analysis?
Technical analysis is a method of evaluating securities by analysing statistical trends from trading activity — primarily price and volume. Unlike fundamental analysis, which focuses on a company's financial health or a commodity's supply-demand dynamics, technical analysis assumes that all relevant information is already reflected in the market price.
Core Philosophy — Five Key Assumptions
- Price Discounts Everything: All known and unknown information — economic, political, psychological — is already embedded in the current market price. Technical analysts focus solely on price and volume.
- Price Moves in Trends: Markets tend to move in identifiable trends — upward, downward, or sideways. Once a trend is established, it is more likely to continue than reverse.
- History Repeats Itself: Market behaviour is cyclical and driven by human psychology. Chart patterns seen in the past tend to recur under similar conditions.
- Market Action Is Predictable (to a degree): Recurring patterns and indicators provide probabilistic insights for traders. Technical analysis is about managing risk, not guaranteeing outcomes.
- Volume Confirms Price: Volume trends validate price movements and signal strength or weakness. High volume during breakouts or reversals adds credibility to the move.
Technical Analysis vs Fundamental Analysis — Quick Comparison
| Feature | Technical Analysis | Fundamental Analysis |
|---|---|---|
| Focus | Price action and market behaviour | Intrinsic value of the asset |
| Data Source | Historical price and volume data | Financial statements, economic reports |
| Time Horizon | Short to medium term | Long-term investment decisions |
| Tools | Chart patterns, RSI, MACD, Moving Averages | DCF valuation, ratio analysis, SWOT |
| Key Assumption | Market price captures all information | Prices may deviate from intrinsic value |
| Objective | Forecast price movements | Identify undervalued or overvalued assets |
| Used By | Traders, chartists, speculators | Fund managers, value investors |
Types of Charts Used in Technical Analysis
Understanding chart types is a basic but frequently tested topic in the NISM equity derivatives certification exam.
1. Line Chart
- Uses closing prices plotted as a continuous line over time
- Ideal for quick trend visualisation and long-term perspective
- Does not capture intraday price movements (open, high, low)
2. Bar Chart (OHLC Chart)
- Shows Open, High, Low, and Close prices for each time period
- Best suited for detailed price action analysis and identifying volatility
- Highlights the price range and directional bias for each session
3. Candlestick Chart
- Similar to bar charts but visually much clearer, using colour-coded "candles"
- Each candle shows Open, High, Low, and Close
- Best for identifying patterns like Doji, Hammer, Engulfing, and reading market psychology
- Green (or white) candle = price closed higher; Red (or black) candle = price closed lower
4. Point and Figure Chart
- Focuses only on price movements — ignores time and volume completely
- Widely used for identifying breakout levels and support/resistance zones
- Filters out market noise; ideal for long-term trend analysis
5. Renko Chart
- Uses fixed price movement "bricks" rather than time intervals
- Best suited for trend clarity and momentum tracking
- Smoothens out minor fluctuations; useful for trailing stop strategies
6. Heikin-Ashi Chart
- An adjusted candlestick chart that averages price data to reduce noise
- Provides strong visual clarity and is ideal for trend-following strategies
- Helps traders stay in trends longer by filtering out false reversals (whipsaws)
The Dow Theory — Six Tenets
Developed by Charles Dow through editorials between 1900 and 1902, and later formalised by William Hamilton and Robert Rhea, the Dow Theory remains a foundational framework in technical analysis. All six tenets are important for the NISM exam.
Featured Snippet Answer: The six tenets of Dow Theory are: (1) The market discounts everything, (2) The market has three trends, (3) Primary trends have three phases, (4) Indices must confirm each other, (5) Volume confirms the trend, and (6) Trends persist until a clear reversal occurs.
Tenet 1 — The Market Discounts Everything
All known information — economic, political, psychological — is already captured in stock prices. This aligns with the Efficient Market Hypothesis and forms the bedrock of technical analysis.
Tenet 2 — The Market Has Three Trends
- Primary Trend: Long-term movement — bull market or bear market (typically one year or more)
- Secondary Trend: Corrections or rallies within the primary trend (weeks to months)
- Tertiary Trend: Minor, short-term fluctuations (days to weeks)
Tenet 3 — Primary Trends Have Three Phases
- Accumulation Phase: Smart money enters quietly before the broader market
- Public Participation Phase: The broader market joins as momentum builds and media coverage increases
- Distribution Phase: Smart money exits; retail investors often enter or exit late
Tenet 4 — Indices Must Confirm Each Other
For a trend to be valid, major indices must move in the same direction. In India, Nifty 50 and Sensex should confirm each other. Divergence between indices signals potential weakness in the trend.
Tenet 5 — Volume Confirms the Trend
Volume should increase in the direction of the primary trend. High volume during a breakout confirms strength; low volume during a rally raises doubts about its sustainability.
Tenet 6 — Trends Persist Until a Clear Reversal
A trend is assumed to continue until there is a definitive signal of reversal. This principle underpins trend-following strategies and the use of trailing stops, moving average crossovers, and price structure analysis.
Understanding Market Trends — Primary, Secondary, and Tertiary Primary Trend
A primary trend is the dominant, long-term market movement — typically lasting one year or more. It can be:
| Trend Type | Description | Market Sentiment |
|---|---|---|
| Bull Market | Sustained upward movement driven by optimism and growth | Confidence and expansion |
| Bear Market | Prolonged price decline triggered by economic contraction | Fear and contraction |
| Sideways / Rangebound | Prices fluctuate within a horizontal range — indecision or equilibrium | Neutral or uncertain |
Technical tools to identify primary trends: 50-day or 200-day Moving Averages, trendlines, Dow Theory volume confirmation, MACD momentum signals, and the pattern of higher highs/higher lows (bullish) or lower highs/lower lows (bearish).
Secondary Trend
A secondary trend is a shorter-term counter-movement within the larger primary trend, typically lasting several weeks to a few months. In a bull market, it appears as a pullback or correction (often 10–20% decline). In a bear market, it appears as a relief rally before the downtrend resumes.
Key characteristics of secondary trends:
- Duration typically 3 weeks to 3 months
- Retracement typically 1/3 to 2/3 of the preceding primary move
- Volume is usually lower than the primary trend, indicating lack of conviction
- Highly volatile and emotionally driven, especially around news events
Tools to identify secondary trends: Fibonacci retracement levels (38.2%, 50%, 61.8%), 50-day Moving Average crossovers, RSI/Stochastic overbought and oversold conditions, and volume analysis.
Tertiary Trend
Tertiary trends are short-term price movements lasting from a few days to a few weeks. They are often noisy, reactive to news or earnings releases, and are primarily relevant to swing traders and day traders. Long-term investors typically ignore tertiary trends unless they signal a larger structural shift.
Characteristics of tertiary trends:
- Usually last less than three weeks
- Highly volatile and reactive to news events, earnings reports, or geopolitical developments
- Reverse frequently — unreliable for long-term forecasting
- Form the building blocks of larger chart patterns like flags, pennants, and wedges
Quick Revision: Key Takeaways for NISM Exam
- Technical analysis focuses on price and volume — all information is assumed to be reflected in the price.
- Six chart types: Line, Bar (OHLC), Candlestick, Point & Figure, Renko, Heikin-Ashi.
- Dow Theory has six tenets — remember them all for the exam.
- Three types of market trends: Primary (1 year+), Secondary (weeks to months), Tertiary (days to weeks).
- Primary trends have three phases: Accumulation, Public Participation, and Distribution.
- Volume should confirm the direction of the primary trend.
Internal Links for Further Reading
- Part 14: Supply & Demand Dynamics of Commodities
- Part 15: Macroeconomic Indicators & Hedging in Commodities
- NISM Series Research Analyst – Complete Study Guide
- NISM Free Mock Test – Practice Now
Sample Exam Questions (Practice)
Q1: Which of the following is NOT a tenet of the Dow Theory?
a) The market discounts everything
b) The market has four trends
c) The averages must confirm each other
d) A trend remains in effect until a clear reversal occurs
Answer: b) The market has four trends (Dow Theory identifies THREE trends, not four)
Q2: In a bull market, which phase do smart money investors typically enter during?
a) Distribution Phase
b) Public Participation Phase
c) Accumulation Phase
d) Consolidation Phase
Answer: c) Accumulation Phase
Next in this series: Candlestick Reversal Patterns, Chart Consolidation & Support/Resistance – NISM Notes