Definition of technical analysis

First section of my technical analysis course – which is still a work in progress; page URL: https://technicalanalysistalk.wordpress.com/technical-analysis-course/definition-of-technical-analysis/

 

In the broadest of categories, analysis of financial markets – ways of analysing any kind of financial product or market – fall into two categories: fundamental analysis and tecnical analysis. With the advent of the advanced technology, computers, super-computers, systems, etc, there is a third branch that some people will not classify under either fundamanetal analysis or technical analysis. This third, new “offshoot”, though only possible because of technology – hence, a modern field of analysis – is very important because of the volume of trading that feeds off of it: it is the use of algorithms in computer systems based generally on statistics or imperfect market opportunities. For most retail and discretinary traders and investors, only fundamental analysis or technical analysis will be the mode of analysis. There are people who use a blend of the two main philosophies of analysis for trading under the banner of üsing the “best of bth worlds”.

There are many definitions of technical analysis that you can read from books and online material. When I was at the beginning stage of my technical analysis journey, I devoured book after book on technical analysis. The first few pages usually started off defining technical analysis. I leave you to read those books and other online material if you want some kind of “official definition” of technical analysis.

Is it important to know the meaning of technical analysis? Yes, but not in a rote sense. I think the best way is to gain experience in analysing charts – reading between the lines, getting a feel of the market’s pulse through a chart – then stepping back and telling yourself what technical analysis means to you.

What does technical analysis mean to me?

Technical analysis is chart-reading. A chart represents the value of something (a market) as it moves along in time. What, then, impacts the value? Supply and demand of the particular market. Supply and demand is affected by a whole lot of factors that I consolidate as “fundamentals” and emotions. Fundamentals include the following: company financials, news, economic data, economic health – various barometers, forecasts, forecasts comparisons, and many others.

TA

 

In the small chart that I created above, you can see the category called emotions followed by two sub-points: fear and greed. It seems like emotions are insignificant but emotions can be blasted into a huge subject on the psychology of trading. There are books on that realm of trading, and I will not cover much of it here. Briefly, there are two ways of looking at psychology of trading: one, how it affects the market as a whole; two, how it affects traders individually. I believe psychology only affects the market in short-term scenarios.

If you view technical analysis through the same lenses that I do, you will see that my definition of technical analysis is that it is a way of interpreting the fundamentals and traders’ psychology that drive the market. If you are looking for “golden rules” to take away from my course in technical analysis, the first is probably this: “a chart is a way of analysing the fundamentals”.

 


 

 

Technical analysis is like looking at the stars

Quite a number of people I talk to discredit technical analysis on the grounds that it is not academic (in the first place, if you look at the definition of academic, technical analysis fits the bill too), it has absolutely nothing to do with the underlying market, and so on. Basically, people who do not believe in technical analysis think it is something independent of the market and economics – like looking at the stars to see what your future holds; no correlation between the two.

Let me explain what a chart means again – or what it does not mean. A chart is not a graph plotted by a machine that is churning out random numbers; a chart is not something that a bank prints out daily based on whatever data that the bankers feel like using as chart inputs; a chart is not like what completely anti-technical analysis people think of a cow going through one side of a machine and lumps of unrecognisable matter coming out the other side (even then, it came from somewhere).

A chart derives its data from the market. This simple concept is the exact same one as a company’s cash inflow or outflow being the sum total of all monies received minus monies coughed out – and you see it on the financial statement. (We actually see how financial books nowadays suffer the risk of unethical but legal “manipulation”, or even outright illegal doctoring.) No one can manipulate your chart (unless your broker decides to print out a different chart from the exchange’s data, which I have never come across or heard before). Every candle or bar or centimetre of line that prints on a chart stays there forever – embedded in history.

Now that I have established what a chart shows, I shall proceed to what chart data means; where does the underlying data of a chart get meaning from?

“The STI (Straits Times Index – barometer of the Singapore stock market) opens the day with more bidders than sellers – because US markets closed favourably during the previous nightnews of the Fed clearly reaffirming an expansionist policy for the next half a year. Nearing lunch, prices are relatively flat. Germany’s manufacturing data points to strong prospects – promising start to European markets drive the STI even higher before ending 47 points above the previous day’s close.”

What we then get is a bullish-looking, “healthy” green candle on a candlestick chart. This is a simple example of how a chart is a depiction of the market. When we extend this example into more than a day in the life of the market, we get into trends – short-, mid-, and long-term; and much more than that.

A chart is not a depiction of fundamentals? A chart of a small company’s stock price increasing by ten-fold in three years because of securing patents and making good inroads into developing markets is rubbish? The company is a scam? The market – no, the chart is unreliable? At this juncture, some of you may bring in the debate of whether market participants – humans – are perfectly rational creatures or not. We do not always have to pitch tents in the extreme ends of polarizing issues. Briefly, I will say that humans are obviously not totally irrational creatures – would you rather park ten metres away from the shopping centre and pay four dollars or park fifty metres away in a multi-storey carpark with an elevator and pay one dollar fifty cents? Yes, I gave such a safe answer: “not totally irrational”; I will change it: “nearly rational most of the time”.

 


 

 

Conclusion

All in all, I want to promote technical analysis as the way to analyse a market and, subsequently, trade it. The reason is that I value a chart more than how some people do. A chart has meaning – as I have explained above. And because the chart is meaningful, I can develop theories and techniques on analysing the market and use this analysis to trade.

At this point, the sharper ones among you will probably say this: “Yes, a chart is obviously based on real market data. You do not need to go around the world – the universe – to explain that. But trading off a bounce from a trendline still has nothing to do with an uptick in the Baltic Dry Index.”

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Frencken in a similar situation to Kencana

Evening all,

The local bourse has been creeping up over the last few weeks; volume is decidedly low, and it does not seem like any group of stocks is making headlines.

Today, I have two charts I want to place side-by-side – that of Frencken and of Kencana. Kencana Agri, F9M.SI, started climbing out of a consolidation in the second half of 2010, and was progressively making higher highs from August through December. At the same time, volume was in a downtrend. The spikes in volume on strong up-days were getting lower, and the general volume was declining. When 2011 came, Kencana reversed, and has never looked back since.

Moving the attention to Frencken, E28.SI, I have an up-to-date chart below. Frencken has been in a very strong uptrend for quite some time: a 45% showing in 2013, and 42% thus far for this year. Since the start of this year, Frencken has been making higher highs in stock price but lower highs in volume of shares traded. I think the picture looks the same as in Kencana. Frencken is, and Kencana was, riding nicely above the 50- and 200-day MAs.

f9m frencken

On any other day, I will be bullish on Frencken because of the nice trend in place. However, with such a “suspicious” formation that looks so much alike to another in the past – and from another chart – I have to be cautious. Let us see how this goes.

 

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

 

Longcheer

Evening all,

With a name like that, I was tempted to use a title like “reason to cheer?” Anyways, this is Longcheer, L28.SI, a China-based company that deals with mobile phones.

Longcheer experienced quite a drastic decline in share price at the start of 2011. Whatever the reasons may were, Loncheer languished at the $0.10 region for quite a while. However, fortunes turned and Longcheer gathered steam throughout 2013 and into this year. The rally was somewhat steady and progressive, which meant that the 200-day MA could almost keep pace with price. Recently, Longcheer made highs at around $0.34 before retracing down to below $0.28. A quick recovery put Longcheer up at $0.30. I like the resilience of this long uptrend that Longcheer is in. Nothing indicates to me why Longcheer’s trend should stop, so I expect to look for set-ups towards the upside.

long

For those who believe in Fibonacci, I took the highs in 2010 and the lows in 2011 – high and low of post-2008 crash – and found an interesting picture. At the 23.6% and 38.2% retracement levels, Longcheer found resistance. The recent breather is expected because of the 38.2% level – but nothing more than that. I think now is a good time to take advantage of the dip for a long set-up to ride the trend if it continues upwards. Let us see how this goes.

long2

 

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

Mid-year bourse review

Good day all,

Time seems to fly pretty fast for me. Somehow, the “trading department” in my mind still has a calendar showing the first quarter of the year. I started the year with many trading ideas and patiently waited for set-ups to trade. Some came while others were like a passing drizzle before getting out of the house: just when you have umbrella in hand and are reaching the end of a sheltered walkway, the drizzle stops and you are stuck with an umbrella for the rest of the day. Overall, the second quarter of the calendar year proved to be an uneventful one for me. Trending stocks took off before I found them, entry orders were teased but not touched, and – fortunately – stops-losses were not getting activated. So – so; mas – o -menos.

Was the market flat since the start of the year? No. The STI put in a good 10+% showing, and quite a few sectors performed decently. The second- and third- line counters also moved. Western indices were more or less higher. I have a chart of the STI below. 2013 carried forward a bearish market into 2014, and the outlook then did not look promising at all. A classic inverted head and shoulders – which I sighted late and ignored – propelled the market above the 200-day MA and close to the 3300 region. As in my last post on the STI, not that many constituents of the STI portrayed the same picture, but there were those that sprung to higher heights.

I was wrong about the STI at the start of the year, but I have the same conviction again: I am not convinced by the rally so far. More so now that the STI is clearly rounding off and volume was tapering off over the last few months. At the top my head, I already have a rough opinion on which stocks that will drag the bourse lower, and those that carried the STI higher the last few months do not look that bullish. The only disagreeable factor in my analysis is the bullishness of western indices so far. The uptrends are still strong and I do not even see hairline cracks (in general).

sti

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

OCBC’s triangle

Good day all,

This is OCBC, O39.SI. Coming out of the crash five to six years ago, OCBC has been on a general uptrend. Towards the middle of last year, OCBC even beat the previous major high and rallied to the $11.00 region – setting an all-time high record too. However, OCBC turned down, and is a good 13% below that high.

Dropping from the all-time high, OCBC traded in a wide range before a nasty descent at the end of last year. The strong slide continued this year before OCBC started swinging again. I draw arrows in the chart below to show that the there are two similar formations on the chart. Will the same result – further slide – happen again?

I am leaning on the bearish side mainly because of the clear downtrend that OCBC is in (though, OCBC’s very long-term trend is up); also, note that OCBC is comfortably below the 200-day MA. A reader of this site highlighted to be a possible ascending triangle in the making (grey lines). This triangle and the formation I mentioned make this an interesting case to follow in the weeks and months ahead.

ocbc

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

 

 

No end in sight

Evening all,

I have a few charts of stocks on upward trajectories for today: Riverstone, AP4.SI; Raffles Medical, R01.SI; Q&M Dental, QC7, and Boustead, F9D.SI. For longer-term plays, I will wait for better prices instead of chasing the strong short-term uptick, especially Q&M Dental.

Riverstone  r01 q  bou

 

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

Hits and misses

Evening one and all,

I have been inactive here for the last few weeks because of a lack of time to put up posts, and I also wanted to give the market some time before I aired my opinions yet again. Since the start of the year, I have been singing the bearish tune for the local bourse. For a while, I was right and satisfied; then, the reversal came. Property stocks swung upwards quickly, the “Jardines” flew – helmed by Jardine C&C, and even the “Agris” rallied. In turn, the Straits Times Index rallied from the year’s low at the end of January – 2960s – to where it is now in the 3200s. In the chart below, I draw 3 brown boxes representing a classic 3-point inverted head and shoulders pattern – this should have been easy to spot.

sti

 

What this all means is that the local equity market has been surprising me. Making up for not keeping up with global indices? Whatever it may be, I am still not convinced with the rally. But that is for another day; when more candles fill up the chart, and with hindsight the picture gains much more clarity.

 

Hits and misses. In the charts below, I show you some counters that I have been proven wrong so far. I did not trade most of them – in case you wonder.

p1 p2 p3 p4 p5 p6

Rally after rally. Olam and Tamasek. Singland and UIC. For  a bear like me, I am starting to feel the heat. Nonetheless, I am still comfortable with what I see on the chart – and that is the most important thing. Now, for some charts to remind me why trend-following is the way.

Remember Osim?

osim

Two stocks that have been on my radar for a long while now: Old Chang Kee and Eu Yan Sang.

Osim, Old Chang Kee, and Eu Yan Sang. Once small companies that are proving to be growing fast and strong – at least, stock chart-wise.

eu 5ml

 

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

 

SIA Engg cruising at all-time high – for now

Evening all,

I have SIA Engg, S59.SI for today. Ever since besting all-time highs two years ago, SIA Engg entered into a distribution phase and traded in a fairly wide range between $4.60 and the $5.00 region. A clear support zone formed just above the previous major post-crash peak. In my last post on SIA Engg, https://technicalanalysistalk.wordpress.com/2013/05/02/singapore-market-moving-up-sia-engg-impresses/, I trusted the strong uptrend at that time. But as time unfolded, SIA Engg sold off quite severely – 10% off the peak. Fortunately, I was not in a position.

SIAE

Now, I shall zoom in on the rangebound market – since this is the current state of the market for S59.SI’s shares. I highlight a number of events inside this flat phase. First, you can see the failed attempt at holding the all-time high surge; then, there is a large symmetrical triangle – although not the best-looking, a clear enough zig-zag price action coupled with ideal volume behaviour confirms the pattern; finally, a bear flag portraying the breakout towards the downside of the symmetrical triangle. What seems like a boring flat market is putting SIA Engg on the radar.

One thing to note is that the flag pole of the bear flag is not exactly ideal: there is a gap in it. Also, the flag of the flag pole seems more like the market filling up the gap casually. As a longer-term player nowadays, I will still take the flat market as it is. But in a few months’ time, if SIA Engg is clearly broken down from this range, I just might look at it seriously for a bearish set-up.

siae2

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Sudden pick-up in local bourse

Evening all,

While international markets were looking for clear direction, the STI picked up some points. The STI is above the 200-day MA for the first time in around six months; an easy to spot downward parallel channel is violated on the upside too. A check on the components of the STI reveals “the Jardines” and a few others were drivers of the recent uptick. Outside of the blue chip category, the property counters are enjoying a good run. Quite a few stocks that I blacklisted into my bearish list have been showing signs of life in the last two weeks or so of trading. Naturally, I am disturbed, and am worried for those that I have a position in; but, these are only short-term swings, and only time will tell if they grow into clear mid-term trends.

In the chart below, I highlight a small head and shoulders pattern that formed somewhere near the top of the parallel channel. At that time, it seemed like the head and shoulders appeared at an opportune time: resistance from the upper limit of a channel (I do not use  channels for trading but I still lay them on a chart for illustration), and rounding off just below the 200-day MA – ready to send the market below 3,000, perhaps. Far from that result, the STI flew up.

While I am still comfortably a bear, I shall see how the recent strong showing pans out.

schart

 

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.

Jaya Holdings – is it now?

Evening all,

Short post tonight on an update of Jaya Holdings. ( https://technicalanalysistalk.wordpress.com/2014/01/29/jaya-sailing-high/ .)

Ever since my last post on Jaya, a symmetrical triangle formed. This triangle is quite good-looking seeing how the lower highs and higher lows can be easily identified. When Jaya breaks out, it shall be as in the classical novel, Moby Dick, “there she blows!”

Jaya

All analyses, recommendations, discussions and other information herein are published for general information. Readers should not rely solely on the information published on this blog and should seek independent financial advice prior to making any investment decision. The publisher accepts no liability for any loss whatsoever arising from any use of the information published herein.