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

10 yrs Cycle and the KLCI

In response to a reader's question whether this cycle theory applicable to the KLCI. Below are the charts for the analysis:

1. 1980 - 1989

In the 80's we can see from the chart above, the KLCI was choppy with a horizontal trend with price index ranging from 200 to 500. It didn't follow the 10 year cycle theory whereby the first few years should be low, and there should be a run-up in the middle of the decade, finally reaching a peak at the later years and follow by a crash. However, in 1987 there was a crash of about 50% from its peak.

2. 1990 - 1999

In the 90's we can see clearly that the KLCI followed the theory whereby there was a nice run-up till 1997 and followed by a severe down turn with price index dropped 80% from its peak.

3. 2000 - 2009

Again during the millennium decade, there was a consolidation in the first few years, then price index had a steep rise from 2006 on wards and reaching the peak in 2008. This round, the KLCI dropped 42% from its peak.

From the above findings, we learned:

• except the first chart, first few years are consolidation years whereby prices are lower compared to the later years.
• prices tend to double from the year 0 to the peak. In the 80's KLCI started with 200 and reached a peak at almost 500 in 1987; In the 90's KLCI started with 600 and ended up at 1200 in 1997; Except in 2000, KLCI started with 1000 and reached a peak at 1400, but if you were to count from the low of 600 in 2001, it was more than double.
• In the 10 year period, there are phases of consolidation whereby prices move within a tight range before a breakout either to the upside or the downside.
• The crash is usually steeper and the duration is shorter than the bull trend.

There are many reasons for the way stock prices behave, in the technical analysis perspective, it is assumed that history repeats itself, from the past data we can predict future price movement. 

Having said that we have to acknowledge the importance of knowing the fundamental analysis too. The best trader will use both in their analysis. 

 

Cycle Analysis and The Stock Market

When we talk about cycle analysis we will definitely think of WD Gann, the legendary stock and commodity trader who had made tons of money from the financial markets. It was estimated that in his lifetime he made $50 million from stocks and commodities. Imagine how much is $50 million 80 years ago translated to today's money. What was his secret?

He had the ability to forecast the market by studying the historical prices. He said, "Everything works according to past cycles, and that history repeats itself in the lives of men, nations and the stock market." (more quotes from him)

In 1928 the year before the crash he successfully predicted the crash in 1929 and said that it would take years for the stock market to recover. You may read his detail prediction  here.

Today I want to talk about one of his famous theory on the cycle analysis, its known as the Decennial Cycle or the 10 year cycle. According to Gann, he compiled the past 100 years of price data and put them on a chart. He plotted the y-axis as the price while the x-axis as the year ending with 1,2,3,4,5,6,7,8,9,0. The actual chart was very blur as it was a very old chart, so I try my best to illustrate on the chart below:

From the above chart, we can see that the year that ends with 1,2,3 such as 1981, 1982, 1983, 1991, 1992, 1993 and 2001, 2002, 2003 have a similar price pattern, they start from low price levels. Year that ends with 7 or 8 usually experience crashes.

Below is an extract from Gann's teaching:

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.

No.1 in a new decade is a year in which a bear market ends and a bull market begins. Look up 1901, 1911, 1921, 1931...

No.2 or the second year is a year of a mirror bull market, or a year in which a rally in a bear market will start at some time. See 1902, 1912, 1922...

No.3 starts a bear year, but the rally from the second year may run to March or April before culmination, or a decline from the second year may run down and make bottom in February or March, like 1903, 1913, 1923...

No.4 or the fourth year, is a bear year, but ends the bear cycle and lays the foundation for a bull market. Compare 1904, 1914, 1924...

No. 5 or the fifth year is the year of Ascension, and a very strong year for a bull market. It can be a new bull market or a big correction in an existing uptrend. See 1905, 1915, 1925...

No. 6 or the sixth year is a bull year, in which a bull campaign which started in the 4th year ends in the fall of the year and a fast decline starts. See 1896, 1906, 1916, 1926...

No.7 or the seventh year is a bear number, and the seventh year is a bear year because 84 months or 84 degree is 7/8 of 90. See 1897, 1907, 1917, 1927...

No.8 or the eighth year is a bull year. Prices start advancing in the seventh year and reach the 90th month in the eight year. This is very strong and a big advance usually takes place. Review 1898, 1908, 1918, 1928...

No.9 the highest digit and the ninth year, is the strongest of all for bull markets. Final bull campaigns culminate in this year after after extreme advances and prices start to decline. Bear markets usually starts in September or November at the end of the ninth year and a sharp decline takes place. See 1899, 1909, 1919, 1929...

No.10 the tenth year, is a bear year. A rally often runs until March and April; then a severe decline runs to November and December, when a new cycle begins and another rally starts. See 1910, 1920, 1930...

This is just one of the cycle theories, there are also the Presidential cycle (4 year cycle), secular bull and secular bear, yearly cycle, monthly cycle and many more. From the study of past cycles, we see a very clear picture that history seems to repeat itself and by learning more technical analysis theories we can make better investment decision to help ourselves to grow our wealth.

Finally, I'm going to end this article with a statistical table to show how accurate is this theory:

Happy investing,
Pauline Yong