Wednesday, April 18, 2012

Pay Attention to the Trendllines

What is a trendline?

Trendline is a straight line drawn on a chart through or across the significant limits of any price range to define the trend of market movement.

Trendlines are one of the first technical aspects of the market to be discovered. Technical analysis is based on the fact that the stock prices move in fairly definite trends. Technical analysts use trendlines in two ways: first, to identify the direction of the movement of the stock prices; second, to determine if and when the movement will change.

Uptrends and Downtrends

An “up trendline” is whereby a line is drawn on the chart by connecting the low points of the security as its price continues to rise. Each low point is successively higher than the previous low. This progression gives the trendline its upward slope.

A “down trendline” is drawn with a line on the chart connecting the high points of the security as it continues to fall. Each high point is successively lower than the previous hig
h. This progression gives the trendline its downward slope.

How to use trendlines?

Prices move in trends. Once a trend has been clearly identified, it's likely to continue for a time. Technical analysts look at trendlines for their ability to support price declines or resist price advances.

In addition, the slope of the trendline tells us the strength of the security price. In general, a healthy trendline should be around 45 degrees sloped. The steeper the slope, the more aggressive is the underlying security, however, it may not be sustainable. On the other hand, the flatter the slope, the weaker is the trend and there may be a possible correction in near term.

An Excercise:

Below is our KLCI chart, you may practice your chart reading skill by studying the chart carefully, let's see if you can make a forcast based on the information given. There's no right or wrong answer, it all depends on your forecasting skills. Enjoy!

(Click to enlarge)

Saturday, April 7, 2012

The Moon And The Stock Market

Have you heard before that human tends to be emotional during the full moon? The reason why I want to talk about this is because statistically shown that mankind behaves irrationally during these periods and this will affect our decision making process in the financial markets.

A study suggests that a full moon really can bring out the beast in us, turning us into irritable animals.

While we may not actually transform into the bloodthirsty creatures of fables and movies such as An American Werewolf In London, research suggests we do display worrying symptoms.

A study conducted in Australia found that in 2009, 91 emergency patients with violent, acute disturbances were happening in one hospital north of Sydney.

According to the research, "some of these patients attacked the staff like animals, biting, spitting and scratching, and the patients had to be sedated and physically restrained to protect themselves."

Of course we can do another research on the crime rate and the full moon to confirm the above claims. But today I have done a small research on this topic and compare to our Malaysia KLCI and to see whether the moon does affect our stock market.

This research is about the distance of the moon to the earth and how this relationship affect our stock market. It is generally believed that people are more rational when the moon is furthest away from the earth, and the name for this type of moon is called "Apogee Moon". Another extreme case is when the moon is closest to the earth and we can see the moon big and round right infront of us, this type of moon is known as "Perigee Moon". It is this perigee moon that often cause people become emotional, anxious, and pessimistic.

So I did a research on the dates of the perigee moon and marked them on the KLCI chart. (The chart may be unclear but if you click the picture, it will be enlarged.)

Amazingly I discovered that the claim is about 86% accurate that the KLCI did experience local low during the investigating period.

On the other hand, there's a research done by, they studied not only the perigee moon, but also the apogee moon (when the moon is furthest away from the earth). They discovered a high correlation between the "highs" and "lows" with the agogee and perigee moon. Most of the time, "highs" happen during apogee and "lows" happen during perigee! In other words, it means that "highs" happen when people are more rational while "lows" happen when people are emotional.

I hope this article is not trying to convince you that astrology is perfect, but just to highlight to you that these little researches help us to look at the stock market in different perspectives.

Happy investing,

Pauline Yong

Wednesday, April 4, 2012

What Is Volatility Index (VIX)

In 1993, a new measurement for the index of volatility for the S&P 500 stock index came out with the purpose of measuring fear and greed. It is called the “VIX”. If the VIX index goes up, the traders and investors may be heading for the exits. Conversely, if the VIX goes down, confidence and optimism are restored, money is coming off the sidelines and moving into equities.

We can't trade the VIX directly but the VIX is traded on the futures exchange and can be traded just like any other investments. In general, VIX values greater than 30 are generally associated with a large amount of volatility as investors are fearful of uncertainty; VIX values less than 20 associate with less volatility and less stressful in the market.

On the other hand, when the VIX is consistently below 20, it means that the underlying S&P is in overbought position and it is due for a correction and vice versa.

There are 4 variations of the volatility index: the VIX tracks the S&P 500, the VXN tracks the Nasdaq, the VXD tracks the Dow Jones Industrial Average and the RVX tracks the Russell 2000. Investors can trade VIX futures for hedging purpose. For example, if VIX starts to rise, it means the level of fear and uncertainty is increasing and you may purchase VIX futures contracts on the Chicago Board Options Exchange (CBOE). If the market does indeed start to sell off and the VIX rises, the profits gained by the VIX futures can help to offset some of the losses that you might experience in other investments.