What A Fantastic Year 2013!

WD Gann once said, "Everything moves in cycles as a result of the natural law of action and reaction. By a study of the past, I have discovered what cycles repeat in the future." 

How amazing, by studying the historical price data, we look at the statistics and generate the probabilities of how price action repeats itself. After all, that's the most important assumption of technical analysis that "history repeats itself".   

Now, let's take a look at the following chart that I published before in May this year.

Gann was able to forecast the 1929 stock market crash accurately in advance and he shared his secret in his publication that in order to forecast for that particular year, all you need to do is to look at the previous years that end with the same number year. For example, to forecast for 2013, you may study the price action of year 2003, 1993, 1983 and so on. 

Unlike the Dow Jones Industrial Average that has 100 years of history, KLCI only has less than 40 years of data. So I go to this website: Tading Economics to get the required data.

From the data, I see that the year ending with '3' is always a bullish year for Malaysia, the chances are 3 out of 3 bullish. This findings help me in planning for my investment into the stock market this year.

In one of my previous article I mentioned that August to November this year would be volatile and it would be suitable for shorter term trading because I saw that the 1983 chart showed that the second half of that year the price action was zig-zag in a horizontal trend. In addition, there were some important fundamental reasons such as the Fed tappering, our Malaysian Budget and other fundamental reasons that help me to come to that conclusion. 

So if you are wondering what's the market outlook for 2014, let me show you the next chart:

Looking at the chart above, we know that 2014 would be different from 2013, we do not have a clear-cut bullish trend. Investing in the stock market will be more challenging but I'm still optimistic about the Malaysian stock market as over the years we have proved that we are less volatile than the regional markets, as we have strong support from the local institutional players.

Below are some thoughts that may affect the market in the near future:

1. Construction and Property Sectors

According to the BMI (Business Monitor International) review on the Malaysian construction sector, they believed there will be some slow down in the construction sector in 2014 due to the falling demand for residential and non-residential buildings. They have maintained their construction growth forecasts for 2013 10.1% and 2014 to be 6.7%.

The property sector will experience some slow down as well due to the cooling measures by our government to curb speculative property activities. I believe this pull back is healthy for our economy as the property market need the necessary consolidation phase to digest the excess supply in the market.

2. Low Interest Rates

With a ultra low interest rate environment globally, the chances of running into a financial crisis is low. Unless there is inflation problem that force the Central bank to raise interest rate, otherwise, we are likely to enjoy this until 2015.

3. Excess Liquidity in the Economy

Ironically, quantitative easing is the biggest driver to drive the financial markets to the ceiling and yet it is currently the biggest risk posed by the financial markets.  In this quantitative easing process the Central Banks from the EU, US, UK and Japan kept pumping in the liquidity into their banking system. In fact JP Morgan's Nikolaos Panigirtzoglou, an expert in global monetary flows and liquidity, said the current excess liquidity is the most extreme ever as compared to the past 3 major episodes of excess liquidity namely: 1993-1995, 2001-2006 and 2008-2010. These were periods of strong asset price inflation suggesting that excess liquidity could have been a factor supporting markets at that time.

Since the 1990's the Fed has been playing the money game by pumping in money each time after a financial crisis instead of long term investment in real products and education. The excess liquidity is doing the economy no good as it merely drive up the asset prices and not protecting our purchasing power parity. 

In order to play along with the music, everyone has to dance regardless whether you like to dance or not. Just like in this money printing world, we are losing purchasing power with our fiat money, we are force to invest in this risky asset environment regardless whether we like it or not, as long as we know the Fed is pumping money into the system, we have to participate in the equity and property markets to protect our purchasing power. If we do not dance with the music we will be losing out. 

At the end of the game, we need to win the game beautifully but the problem is how? Because we never know when will the music stop. Right now, keep investing as the music is still playing around the world.

The Budget 2014

The recent announcement of the Budget 2014 was unexcited as predicted. Compared to the last Budget this budget is more realistic as we need to look into our deficit problem seriously as Fitch has already downgraded the Malaysian credit outook from "stable" to "negative" in July this year.

Currently, Federal Government debt at 54% of GDP while Household debt at 83% of GDP; Our budget deficit was 4.5% of GDP this year (for budget deficit > 5% is consider unhealthy). Hence a contractionary budget for next year is expected as people need to wake up from the over-indulgence of 'goodies' during the pre-election period. There is a price to pay for all the big spending!

However, the GST is further delayed to 2015 which also mean that the budget in fact is not that contractionary and our credit rating of 'negative' may remained for quite a while.

Moving forward, as far as KLCI is concerned there are winners and losers sectors for this budget. The winners are: telecommunication (increase of internet coverage in the rural areas), Oil and Gas, and Construction (West Coast Expressway, Doble-tracking rail project).

Biggest loser is the property sector especially the properties that rely on foreign buyers like the Iskandar region in Johor. As for the sin tax, the price hike in tobacco was implemented one month before the budget announcement day with a tobacco excise tax of 14%.  

The new RPGT of 30% for the first 3 years with no DIBS will definitely dampen the property market. However, I don't think there will be a major crash in the property market, but more like a mild correction kind of consolidation will take place as many of the projects will only be ready beyond 2015. 

For example, if you are holding 3 or more condos with price below RM1 million, you'll most likely have the difficulty to look for local buyers as most Malaysian middle income earners can't afford to buy a property in the sub sales market. The difference between buying from the developers and from the sub-sales market is that, if you buy from the developers, very often you do not need to pay high down payment, low (or non) legal fees, DIBS (now no more), easy to obtain the loan approval from banks. But if you are buying in the secondary market you need to pay tens of thousands of ringgit for the legal fees, stamp duties, down payment and etc. Hence, this new ruling in fact is a nightmare for speculators with no holding power but a good news for genuine buyers because it's everyone's dream to own a house for old age retirement and for the next generation.

Now you may be thinking what is my advice for the general equity investor. My advice is keep investing in the equity market. Buy only when the KLCI has a minimum correction of 80 points - 120 points. Sell when you see your stocks rise by 20% - 30%.  Once you've sold your position do not buy immediately but to wait patiently for the next opportunity to strike. If you recall my previous articles, there were 2 strategies that I mentioned before: 

1. Buy at the cycle low that usually happens in the month of February, May, August and November.

2. Buy when the KLCI is in a correction mode. A correction happens when the KLCI violated the trendline and the 20 day MA. When the index is in the correction mode, individual counters usually reacted more.

For sell signals it is up to the individual investor, it could be a 3-to-1 reward to risk ratio, below 20 day MA, or any other technical indicators that you are familiar with.

For questions and enquiries you are most welcomed to emailed me at info@stocktips123.com

KLCI 4th Quarter Price Trend

People who are new to the stock market may think that the stock market is a chaos market operating in a random manner. As you do more and more research into the historical stock prices you will see the picture clearer that the stock market is in fact rather predictable . Below are some KLCI historical charts for your viewing.

As you can see interestingly, November is always "down" and December is always "up"; September is mixed, while October has been up for the last 3 years, but for this year I would say it might be a mixed month due to the strong rally in September with rather steep slope of rising. 

How well history repeats itself depends on the actual outcome 3 months later.

Happy Investing!

2010 Sept - Dec

2011 Sept - Dec

2012 Sept - Dec

2013 Sept - Dec

Runaway Bull Market - The Dow Jones

In the beginning of 2013 hardly anybody will predict that the US market will experience the so called "Runaway bull market"! Runaway bull market means that the market is rising without a 20% correction. If we look back at the history, the last >20% correction was in 2011 August - the debt ceiling crisis. Prior to that was the 2008-2009 prolonged bear market that the DJIA was wiped out by more than 50% from its peak of 14,000. 

Nobody can predict accurately when is the next major market correction but there are a few factors that will determine the direction of the market: the Fed, the interest rates and the slowdown of the Chinese economy. To a lesser extend, some may even think that there could be a commodity crash but I think the possibility is low, but I would not rule out completely as 120 years ago in 1893 there was a stock market crash sparked by the Sherman Silver Purchase Act that caused massive bank failures during that time.

Malaysia market so far has been quite resilient without much affected by the recent Asian market sell down by the foreign funds. If you have been following my articles, you will know that I recommend the timing for entry into the market is February, May, August and November as these are the cycle low months of the year statistically. However,  I would advice investors to be cautious from August till November as these months are more volatile historically with many stock crashes happened before.

Moving forward to the second half of 2013, my stance still holds that generally this year will be a bullish year with some minor corrections of not more than 10% each. Support is 1600, resistance is 1840. And my favourite sectors are properties, construction, oil and gas.

Good luck to your investment, remember to take profits, lock in your gains first as there'll be plenty of opportunity to buy low sell high. 

Happy investing,

Pauline Yong 

Learn TA from the Teacher of the Teacher

Everyone knows that I do conduct stock analysis classes for the general public, however I 'm not selfish to recommend to people who would like to learn advance technical analysis knowledge from a very dedicated teacher who is more than qualified to teach the course. He is also my teacher, Mark Lim.

Course: CFTe/ CMT online Masterclass in Financial Technical Analysis

Website: http://www.tradermasterclass.com/

• Course Format: online webinar
• Duration: 30 weeks
• Commencement Date: 15-8-2013
• Course Schedule: One online lesson per week
• Lesson Times: Thu 7:45pm - 10:45pm

To know more, please visit his website or contact Stella on 012-4994885

Correction Phase Continues

The US DJIA and S&P 500 had a critical move last night that finished both below their trendlines. This will be the first major correction since last year November if the DJIA and S&P 500 couldn't go back to their support within 3 days starting today. Below are the charts for the possible downside targets for the US markets:

Historical speaking, these kinds of major corrections happen once or twice a year in the US markets for the past 3 years. In 2011 had a 18-20% correction from top as the correction was overdued. The DJIA broke the 1 yr trendline in August due to debt ceiling crisis in the US, and it lasted for about 8 wks.

In 2012, there were twice, once in the mid-year May, the other end of the year November. Each correction is 9% from top and the duration was shorter than 2011.

Hence if 2013 experience like what 2012 did, most likely we shall see 2 corrections for the year with one in June, the next in November as well. The downside target for DJIA is 14,100 which is calculated from subtracting 9% from the recent peak in May. I see strong Gann support at 13,800 for the DJIA.

Similarly, for the S&P 500, downside target is 1530 (9% from recent peak) with a strong support at 1500.

For KLCI, most likely we will be supported by the long term trendline that started since March 2009 which is 1680.

As for STI, today we shall see the index testing the recent low at 3094, the immediate support is 3075, if this level is broken, the next support level will be 3000.

In short, it is very important we can identify whether this is a crisis where the stock markets undergo a major bear trend with multiple months or a healthy correction with 2-6wks of downtrends. For a crisis like the recent ones, we had the 1997 Asian Financial crisis, 2008 US Subprime Morgage crisis where wee saw rising interest rates, massive corporate failures and bank failures, and currency depreciations.

On the other hand, for a correction to take place, it will be preceded by news that erode investors confidence such as: possible Greek exit the eurozone, US debt ceiling limit, but not like the above crisis scenarios. This round, its the withdrawal of QE should the US economy improves further. Frankly speaking, I think what the US Fed is doing is on the right path as we do not want to see excessive money printing, which will give rise to a lot more problems in the future.

Finally, the above analysis is my own opinion, it is not for recommendation or advice. I'm just sharing my knowledge as I want to help people to see things in a more objective way, the more information you have, less uncertainty it is.

KLCI Correction Phase

Here are some charts looking at how KLCI perform during the correction phase.
Usually I consider a valid correction phase as price violates both trendline and the 20 day MA. Hence from the chart below we see once these 2 lines are violated, the correction phase will last  9 - 47 trading days or 2 - 9 wks depending on how bearish it was.

From the findings:
2009 - no major correction as just emerged from major bear trend in 2008
2010 - 2 times
2011 - 2 times
2012 - 3 times
2013 - so far 1 time

KLCI Historical Price Chart 1981 - 2012

Legendary investment guru, W.D. Gann once said: "Each decade or 10-year cycle, which is 1/10th of 100 years, marks an important campaign. The digits from 1-9 are important. All you have learn is to count the digit on your fingers in order to ascertain what kind of a year the market is in."

So I did a research on our KLCI prices for the past 32 years to see if there are any repetitive chart patterns and I discovered that:

1.      the years ending with 3, 6, 9 are usually bull years.
2.      among these 3 years, year ending with 9 has the biggest gain in history with 30% -175% gain, followed by 3 with 30% - 100% gain, and 6 with 18% - 22% gain. 
3.       years ending with 1 and 5 are the worst performing years with year end closing price below or equal to the beginning price. 

          4. years ending with 7 and 8 tend to have stock crashes with the exception of 1988.     

     Although the charts are only applicable to the KLCI component stocks, but these findings are amazing! Most people think that market is random, you can't predict the market, however, the research shows that history does repeats itself and market is made up of crowd psychology, human behaves repetitively to certain external stimuli. In addition, in cycle analysis, it is believed that the "Nature's Law" or the "Secrets of the Universe" are affecting human emotion which in turns affect the financial markets. At least this is what Elliott and Gann had proposed in their books. Gann seldom revealed his secrets in trading as he thought that "people are not ready yet!" Gann had his unconventional ways to forecast the financial markets that I will not elaborate further (but I may in the future if people are more ready). 

       Since It is always good to use both fundamental and technical analysis in stock analysis,  let's look at this findings objectively. For example, if 2013 is a bull year, then it must be supported by the fundamentals. The EU economy is weak with austerity measures, the US is recovering but unemployment remain high, international fund managers most likely will consider emerging markets to invest, especially the South East Asia nations like Indonesia, Thailand, Phillipines and Malaysia due to their vibrant economies that are undergoing  structural change. As standard of living is rising for these emerging markets, these economies have rising domestic consumption, improving infrastructures such as the construction of Mass Rapid Transit in Kuala Lumpur and Jakarta, and moreover, all of these emerging countries have pro-business / pro-investment governments to attract FDI into their countries. 

     On the other hand, we must not forget history shows that with the influx of FDI, or foreigners purchasing our properties and shares, these emerging economies are subjected to the risk of hot money being pulling out if there is any negative news. 

      I do see some similarity between now and the 90's. Knowing what had happened before, it is important not to let the history repeats itself. These economies must do some precautionary measures such as cutting budget deficits, curbing asset bubble, and of course, let's build a more efficient government together!  

  

      Below are the historical charts:

   

Musing On Election

Some after thoughts on the Malaysian General Election:

High Turnout Rate

The 13th GE has the highest voting rate in Malaysia's history with 85%! This shows that Malaysian citizens are politically conscious and we want to take part in this meaningful event.

Super Senior Citizens

Super senior citizens age 90 and above have shown their keen support for the country. From the statistics, there are close to 40,000 of these people voted. Among them, East Malaysia including  Sabah and Sarawak has the highest rate of participation with more than 10,000 votes. For secrets of longevity can ask these people!

Social Media

For this election, social media plays an important part in getting the youngsters to be interested in politics. Of the 13.3 million registered voters, about 40% are aged below 40 years old, these people are active users of social media such as Facebook and Twitter. Hence social media becomes an information hub for the voters where they can learn the procedure for voting from the youtube videos and photographs. 

Chinese Tsunami

The prime minister made a statement after the election stating that the Chinese tsunami is the contributing factor for the poor win by BN. However, from the statistics, we can see that urban Malay votes are deserting the BN too. It is clear that it is more than ethnic issue here. From various sources of surveys, the top reason why the Malaysian are not happy with the government is: Corruption! And it is this "fighting for anti-corruption spirit" keeps the Malaysian together regardless of race.

KLCI

Now that the election is finally over and BN won, the market responded with a big rally. My forecast for KLCI, based on Elliott Wave Theory, is 1800 by June or July, looks like it has already touched this level (intraday) yesterday, which was the next morning after the election day. Hence I will raise my target for this year to 1840, with a strong support at 1600 till end of the year.

Finally here's a quote from Obama: "In the end, that's what this election is about. Do we participate in a politics of cynicism or a politics of hope?"

My next investment workshop for the beginners will be:

Date: May 18th 2013 (Saturday)

Venue: Women's Institute of Management (KL)

Contact: 03-77250268 for more info.

Price Range for KLCI

I would like to share with you one of my recent research on our KLCI prices. From 2010 onwards, KLCI seems to react well with these prices.

In your chart, draw horizontal lines with numbers 1320, 1400, 1480, 1560, 1640 and 1720 across the KLCI chart, and you will realise these are support and resistance lines for our KLCI.

Notice that I use 80 points for the lines, you may try 40 points for shorter term analysis. The purpose of this exercise is to establish a bigger picture of where are the possible turning points. I hope this helps in your KLCI futures trading.

Please note that the study of price range alone does not generate buy or sell signals, this is just an addition to your tools of arsenal for trading. Always remember to use with trend lines to spot the key reversal points.

Happy trading,
Pauline Yong

BTW, my price target for KLCI for 2013 is 1560 - 1800.

Choosing Stocks With PRINCE D Criteria

In my book "I Love Stocks" I used a set of financial ratios as stock selection criteria, they are:

PE ratio, Return on equity, Institutional (big players) support, Net tangible asset, Current environment scan, Earnings per share growth and Dividend yield. Taking the first alphabet from each we can get: PRINCE D or we call it the Prince D, like Princess Diana.

In January, I have come up with a list of stocks to share with my students who attended my stock analysis workshop (see the tables below). Many people have been telling me they are waiting for the big crash after election then they will enter the market. Then I asked them, what if there is no crash, and the price shot up after election, would you still buy then?

If everyone thinks there is a crash on certain dates, most likely you won't see one because a stock market crash happen unexpectedly, not on anticipation.

Then when can I buy (into the stocks)?

One good strategy is to buy on stages. Buying on stages will eliminate the negative emotion that is affecting your judgment in stock selection. For example, you may invest 1/3 before election, another 1/3 of your available funds in May, and the final 1/3 in November and hold the stocks until 2014 - 2015. The reason why invest in May and November is because if you look back at the historical prices for our KLCI, there are certain months always experience cycle low, they are: February, May, August and November. If you are a long term investor who has decided to invest regularly in the stock market these months are good entry points for you.

Below are 3 categories of stocks for selection. The first is the dividend stocks, good for FD alternative. 2nd group is small cap stocks as I think small cap stocks offer better capital appreciation than the larger caps now. The 3rd group is the political linked stocks which I believed if BN wins, these stocks will soar.

Everyone has their own investment style, personally I do not like to speculate, I prefer to buy and hold, or I hold until there is fundamental change in the investing environment such as inflation is too high, interest rates are rising or there's a war.

This article is not for stocks recommendation, its for educational purpose.

Happy investing,

Pauline Yong

General Election - Crisis or Opportunity?

Yesterday KLCI plunged 40 points (2.5%) to 1635, while the KLCI futures plunged almost 60 points to 1624! Technically speaking, KLCI has violated 50 day and 100 day moving averages, and looks like the next supporting level 1620 (200 day moving average) is shaky. 

All these happened because the latest speculation on the election date is March 30th 2013 which has caused investors highly uneasy as they are worried about the outcome of the election.

In my personal opinion, (no offence to any party), that there are 2 possible scenario: either the BN will win by marginally or lose by marginally, assuming the opposition party increases their parliamentary seats from 20% to 40%, ie, from the current 82 seats increases 20% to 98 seats based on the assumption that the MCA (Malaysia Chinese Association) will lose majority of its 15 Parliamentary seats plus several seats from other BN parties. Or for the opposition party to win marginally, they need to secure 112 seats out of the 222 parliamentary seats, in other words, 14 more seats on top of the above scenario. 

Given the above scenario, in either case, most likely we shall see the opposition party gaining more seats in the parliament. In the eyes of the foreign investors, this is good news because this may mean there are more checks and balances in the country. For Malaysians, this is good for us too as no matter which party win, the winning party will work extra hard to gain the people's votes so that in the next election they can retain the power; while the losing party will also try their best so that they can win the next election. 

Currently, as the EU and US economies are weak, Asia is still the no.1 choice for the multi billion international funds. Not only that, as the global interest rates remain low, rich investors from Japan, Korea, China and Singapore will buy up the properties and shares in the ASEAN countries and they will even set up factories here. 

Rosy picture like this is happening but it is slow due to the uncertainties in our election. However, once the election is over, foreign investors will come in big wave if they see that both the ruling and the opposition party work together to fight against corruptions, reform the education system, bring in more FDI, and to build a truly 1 Malaysia for its people. 

So from now till the polling date, the KLCI will continue to be volatile, political linked stocks will sell down, but I believe in any crisis there is an opportunity. Warren Buffett said, "Be fearful when others are greedy; and be greedy when others are fearful".

Happy investing,

Pauline Yong

Rules For Trading In Stocks Part 2

Today I'll continue with 2 more rules.

Rule No.4: Buy and Sell on 3 Weeks Advance or Decline
Markets do not go up forever! There must be some profit taking involved along the way. In Gann's rule, he said "buy when the market is decline for 3 weeks in a bull trend". What this means is that when the market is up for about 2-3 months, there'll be a correction, this correction usually takes in the form of 1-3 weeks decline, after which  the bull trend resumes. So to apply this rule, we have to wait for the market to decline for 3 weeks, then start buying, but remember to put a stop loss should the decline extend further. If the market only decline for 1 week, no entry. Similarly, in a bear market, markets do not fall forever, after a few months of decline, there will be a pull back. In Gann's rule, sell after 3 weeks of bear rally.

Chart 1: KLCI 2010

The above chart 1 illustrate this perfectly well on our KLCI in the year of 2010. The 3 sell down in the month of Feb, May and Nov lasted about 3 weeks or 15 days (1 week = 5 trading days).

Next, Gann said, "after the market advance or decline 30 days or more, the next buy or sell point is 6 or 7 weeks. And after a market rallies or declines more than 45 to 49 days, the next time period to watch is 60 to 65 days."

To illustrate his statement, let's take a look at the chart below: Chart 2 KLCI 2011

In the first half of 2011, news on the euro debt crisis causing the market to react negatively. Between mid January to mid March, the sell down lasted about 7 weeks, which is 36 days in exact. In addition, in the second half of 2011, the US debt ceiling crisis resulted in stock market crashes around the world. KLCI reacted with a sell down for 60 days! After which the long term bull trend resumed.

Now, the question is how do we know what's the duration of the decline? We do not know, we just need to keep our stop loss at bay to protect ourselves.

Chart 3 KLCI 2012

Recently in November 2012, we had exactly 16 black candles, that was unusual as it was consecutively black candles with no white candle in the middle. However, 16 days is close to the 3 weeks of Gann's rule, so the rule still applied for this case.

Rule No.5: Market Moves in Sections
Market moves in sections or waves. Usually for a bull market, you will see 3 or 4 up waves before you can consider the top.

Similarly, in a bear market, never consider the market final bottom when you see the first decline wave because it will run 3 or possibly 4 sections before the bear campaign is over.

Chart 4 KLCI 2006 - present

From the chart above, we are currently on the 3rd wave. We do not know how long this wave will last, or there could be a 4th wave. Only time will tell. My advice for long term investors is to use the 200 day Moving Average as a reference, sell when your stock falls below this line, and get back in once it is above the line again.

Happy Trading,
Pauline Yong

Rules For Trading In Stocks

In November last year I said the market would turn around by 30 Nov 2012 and the market did recovered around that time. When it comes to trading, technical analysis can help us to make some forecast base on how prices behave in the past. In today's article, I would like to share with you 3 stock trading rules by W.D Gann, in his book titled "45 Years In Wall Street".

Rule No.1: Determine The Trend
Always identify the primary trend first. This can be easily identify using trendlines and moving averages. As a rule of thumb, 10,20 MA are for short term trends, 50, 100 MA medium term and 200 MA for long term trend. When the price is above the 200 MA or the long term trendline, it shows that the stock is in a long term bull trend such as the diagram below.

Rule No.2: Buy at Single, Double or Triple Bottom
Buy at single, double or triple bottom. This is an important rule especially for double bottom when you see that the second bottom is higher than the first bottom, it would be a compelling buy signal.

Similarly, sell at single, double or triple top as these are obvious price patterns that most traders will see and they will act on it at the same time. Always remember to determine your stop loss point and follow your plan strictly.

In addition, do not overlook the fact that the 4th time the stock reaches the same level (either top or bottom), it is not safe to sell or buy because it nearly always go through.

Rule No.3: Buy and Sell on Percentages
Buy or sell at 50% decline from any high level; or 50% advance from any low level. This is because 50% is an important support and resistance level.

Above is the chart for Genting Singapore. It fell from S$2.36 in November 2010 to $1.18 in November 2012, exactly 50% decline. Although, sometimes it may decline beyond 50% but as a rule of thumb, start buying when you see 50% decline from the peak won't go too wrong.

Today I'll just talk about 3 rules, next week I'll share with you with a few more rules from this book.

Happy Trading,
Pauline Yong