Tuesday, January 22, 2013

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

Wednesday, January 9, 2013

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

Saturday, January 5, 2013

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