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