What is Technical Analysis?

Starting from this week, I'll post some educational articles on Technical Analysis, so that we can learn together and use the knowledge for 2012!

What is Technical Analysis?

Technical analysis is the study of charts whereby we can make investment decisions based on the following assumptions:

(1) History repeats itself, consequently, past trends predict future ones.

(2) The price pattern is the sum of all the behaviours of the market crowd. Therefore, technical analysis tracks the psychology of the market.

While fundamental analysis helps us to study the financial health of a company, technical analysis gives us an idea as to the direction of the stock price. Very often, a techincal analyst can identify trend changes at an early stage, and act on it.

First we need to know what a stock chart is.

Stock Chart

A stock chart is also known as a price chart. It has two parts to it: the upper portion depicts the price movement, and the bottom shows the volume traded.

Next, we need to understand Volume and Price relationship. There are 4 types of Price-Volume relationships:

1. Heavy Volume with Rising Price

This is a healthy sign in the market. It tells us that there are a lot of trading activities going on and buyers are outnumbering sellers. When volume is heavier than yesterday’s volume, and accompanied by a price increase of at least 1%, it may be signaling a trend reversal from bearish to bullish soon.

2. Heavy Volume with Falling Price

This is a troubling sign as it shows that the investors are bailing out. When volume is heavier than yesterday’s volume, accompanied by a price decline by at least 1%, it could mean warnings and a possible trend reversal from bullish to bearish.

3. Light Volume with Rising Price

Light volume with rising price may indicate that the price is losing steam. The price is going to drop soon, as investors are not willing to pay for the rising price.

4. Light Volume with Falling Price

On the other hand, light volume with falling prices may indicate the price is bottoming out. Investors are holding on to their stocks rather than selling for lower prices.

So, investors should pay attention to signs of heavy volume in the market. Observe the volume together with price trends and you will see important signals sending out to the market crowd.

In addition, when you see a price rise or fall on light volume, it indicates that heavyweight investors are staying on the side lines—thus, it is not as significant.

Try to download the free charting software from Chart Nexus

And practice the 4 types of Price volume analysis on the charts, you'll start to see some lights in technical analysis.

Happy investing,

Pauline Yong

CIMB, Padini, Planitu

In response to a reader's request, I'm writing this for sharing purposes only.

The followings are my personal views, there are for educational purpose, not intend for any form of advice.

Plenitude (RM1.99, PE 6.1, NTA 2.91, DY 4%)

Short term outlook: Trend:double top forming; MACD:losing momentum; Stochastic: turning down from overbought position; OBV: turning down but stabilising could indicate possible side way trend.

Medium & Long term outlook: Trend: down, bounded by 200day M.A. as strong resistance.


Padini (RM1.09, PE 8.5, NTA 0.43, DY 4%)

Short term outlook: Trend: sideways although it's above 200day M.A., because it dipped below 200d MA and emerged from it, hence it is likely to go through some consolidation phase before the next move.
Indicators: MACD, OBV & Stochastic shows signs of loosing momentum
Volume: low as price move lower, so its a positive note here as investors are still willing to hold on to the stocks, despite a shooting star on Dec 5th.

CIMB (RM6.89, PE 13.6, NTA 3.37, DY2.9%)


For CIMB I'll use Ichimoku to analyse. From the chart, CIMB underwent a steep fall in its share price since August. Currently, the price is moving into the 'cloud' (in blue), this shows some consolidation taking place. Short term wise (within 1 month), the price may move between RM6.60 - RM7.80, by end of Jan - mid Feb, there might be a bigger move, if the price move above the cloud, it is bullish, if it dip below the cloud, its bearish. Keep our finger crossed!

Above are just the technical aspects, and it's rather short term. For a bigger picture, we need to look at the industry outlook as well. For example, Padini in the garment manufacturing sector may face more weakening in profits due to global recession. As for Plenitude which is in the property sector might face similar situation when the property market cools down. Among the 3 stocks, I like CIMB most because I believe it is in an oversold position, the chances of a rebound is high in the short term.

Happy investing,
Pauline Yong

George Soros: When I see a bubble I'll buy, and I see a flaw in the bubble, I'll sell!

Do You Invest Based on Your Intuition?

"Do you invest based on your intuition, the fundamental or the technical analysis? This is a question posed by a 18 year old girl who attended my investment workshop last month in KL. I thought for a moment and answered: "Both technical and fundamental." Shortly after, I continued, "sometimes intuition!" I know when I said "intuition" it may discredit myself but I have to give an honest answer, because that's the way I trade - a combination of everything, technical, fundamental, psychology, market sentiment, feng shui and intuition!

Some people will relate "intuition" with feng shui or astrology as they belong to the non-scientific world which is difficult to explain. There is really no right or wrong answer when it comes to investing or trading, because investing is an art!

In the history of investing, there was one a famous investment guru who traded using geometry, astronomy and astrology. He is the legendary William D. Gann who invented the famous Gann Theory - a time cycle based technical analysis.

Gann was born in 1878 and died in 1955, he had witnessed the great depression, the World War 1 and World War 2, the ups and the downs in the stock market for 50 years! He could make prediction of the stock or commodity with the exact price on the exact date! In today's word, he was like a fortune teller, but loaded with strong financial knowledge. For example, in 1909 Gann made the prediction that the price of wheat would go to $1.20 by 12 noon on September 30th. On that day, at the opening, the wheat was selling below $1.08 and it looked as though his prediction wold not be fulfilled. In the end, the wheat did closed exactly at $1.20 at the end of the day!

He also successfully predicted the massive stock crash in 1929. In November 1928 in his annual stock forecast report , he wrote:

"This year (1929) occurs in a cycle, which shows the ending of the bull market and the beginning of a prolonged bear campaign. The present bull market campaign has lasted longer than any previous campaign in the history of this country. The fact that it has run longer and prices have advanced to such abnormal heights means that when the decline sets in, it must be in proportion to the advance. The year 1929 will witness some sharp, severe panicky declines in many high priced stocks....
.... First decline culminates around September 30th; then a rally making top on October 2nd, followed by a decline to October 24th; then a final top around November 2nd to 4th, followed by a big decline, reaching bottom around December 18th to 20th; then a rally to the end of the year." (Does this sounds like a fortune teller?) The stock crash started on October 29th 1929.

Despite having the ability to forecast, Gann emphasized on investment knowledge. He believed knowledge is power! He said: "The difference between success and failure in trading in commodities is the difference between one man knowing and following fixed rules and the other man guessing. The man who guesses usually losses. Therefore, if you want to make a success and make profits, your objective must be to know more; study all the time; never think that you know it all."

I agree with him totally! Although he was gifted in a way, he stayed humble and used his solid financial knowledge to confirm his prediction. We shouldn't rely too much on feng shui or astrology either in investing or in our daily lives. We must stay objective, equiped ourselves with the right knowledge, and most importantly, stay humble and always have the quest to learn more. With these positive attitude, success is on the way!

More on Gann

Happy investing,
Pauline Yong

Technical Analysis - Time Cycles

Many of us have been focusing too much on the technical indicators and moving averages, and neglected one important aspect of the technical analysis - the time cycles.

Time cycle is the study of the TIMING of the market boom and bust, which tells us the timing of the event happen as history keeps repeating itself. According to one of the pioneers of cyclic analysis, Edward R. Dewey, "something out there in the universe must be causing these cycles (bulls and bears) ... there seemed to be a sort of pulse to the universe that accounted for the pervasive presence of these cycles throughout so many areas of human existence."

For example, take a look at our Malaysia GDP growth chart

From the chart, we can see that in the history of our Malaysian economy, the recessions were recorded in 1973, 1985, 1998, 2009, which is 12 years apart with the exception of 1998. In feng shui perspective, they all fall in the year of OX (1973, 1985, 2009) and Tiger (1998)!

I also discovered another horoscope that is prone for stock crash - the year of Snake. For one the Great Depression started in 1929, the year of Snake, subsequently we also have smaller crashes in 1965, 1977, 2001 and possible 2013? Is it coincidence or there is really something out there in the universe making this happen?

There was a Russian economist, Nikolai Kondratieff discovered this during the 1920's and published a book called "The Major Economic Cycles" in 1925. In his book, he noted the repeating behaviour of the economic cycle which is deemed capitalistic in the communist world, as a result, he was sentenced to death and died in a Siberian labour camp in 1938. Despite the tragedy, his work was recognised by people and his theory is known as the Long Wave Cycle or the K-Wave theory.

In the K-wave theory, there is a cycle of around 60 years divided into 4 seasons: Spring, Summer, Autumn, and Winter with each lasts about 15 years. For example the big cycles are as follows: (source from Wikepedia),

1. The first industrial revolution started in 1787 - 1842 (55yrs)
2. Rail Road and Steam Engine era 1842-1897 (55 yrs)
3. Age of steel and electricity 1897 - 1939 (42 yrs)
4. War and Post-war boom 1939 - 1982 (43 yrs)
5. Information Technology era 1982 - ?

As we can see if we add another 40yrs to 1982, it become 2022, which is 11 yrs from now. According to many analysts, they believe we're now going through the Winter wave of the K-wave cycle. How far is this theory hold true, I leave it to you to interprete. There are 2 more articles relating to this K-wave:

Article 1
Article 2

Happy investing,

Pauline Yong