Flexible in Analysis, Strict in Cutting Losses.

There are many different indicators in Technical Analysis, but the most important aspect will be on Chart Patterns and Primary Indicators like Bollinger Bands and Moving Average. A smart investor should be flexible in choosing the correction indicators in different market conditions. This week, we have two case studies in using different indicators, as well as the trading / cut loss plan for these case studies.

Case Studies:
KNM - Breakout away from Downtrend.

Chart1:KNM – 7164, from 8/5/2009 to 24/09/2009.

As indicated by A, price of KNM breaks above the T1 downtrend line on the 16thof September, and also breaking above the 14, 21, 31 EMA, dynamic resistance. This shows that KNM is now away from the T1 downtrend, but it has not yet formed an valid uptrend.

As indicated by B, when price of KNM breaks above the T1 line, volume increased significantly, suggesting some increased of buying interests. As indicated by C, after rising for a few days, price of KNM started to retreat as profit taking activities begun, due to the festive holiday. However, as indicated by D, volume decreased significantly as price retreat, this suggests that the selling pressure was not strong, thus a healthy correction.

The first characteristic of forming an uptrend is the formation of a Higher-low, and therefore, if price of KNM should rebound from the 14, 21, 31 EMA, and form a Higher-low, there is a chance that KNM is forming an uptrend. If volume should increased substantially when it forms a Higher-Low, it would be a stronger signal, and investors could take it as a buy signal, and the first cut-loss point is at RM 0.69 level.

If price should continue rising after forming a higher low, the 14, 21, 31 EMA can serve as the dynamic support as well as the trailing stop reference for the uptrend. In other words, as long as the price of KNM could maintain above the 14, 21, 31 EMA, investors can keep their shares until price break below the 14, 21, 31 EMA. The immediate resistance for KNM is seen at RM0.80 level, followed by the RM 0.90 level. A strong resistance is seen at RM 1.09.

Major Shareholders:
1 INTER MERGER SB 479,636,322 Shares（12.15% ）
2 CIMSEC NOMS SB CIMB BANK BHD - INTER MERGER SB 368,053,400 Shares（9.33% ）
3 EMPLOYEES PROVIDENT FUND BOARD 273,791,104 Shares（6.94% ）
4 CARTABAN NOMS SB SSBT FUND HG22 - SMALLCAP WORLD FUND INC. 231,151,000 Shares （5.86% ）
5 HSBC NOMS SB EXE.AN-JPMORGAN CHASE BANK NAT.ASS. 146,106,375 Shares（3.70% ）

Latest Financial Highlight as at 30/6/2009：

PER	8.35 times	Dividend Yield	1.95%
Dividend		Dividend Yield	Net ProRatio
31/ 12/ 2008	1.5 sen	3.75%	13.30%
31/ 12/ 2007	4.0 sen	0.63%	15.31%
31/ 12/ 2006	5.0 sen	0.55%	14.56%
31/ 12/ 2005	5.0 sen	1.36%	11.97%
31/ 12/ 2004	3.0 sen	1.05%	8.41%

Table 1: KNM Financial Highlights.

As shown on Table 1, KNM is making consistent profit, but it is not considered a high dividend stock. Therefore, this is generally more suitable for trend / position trading for short and mid term. However, if the broad market condition is favorable, investors could choose to trade long term, but not keeping this stock for dividend income if the market trend turns weak.

UEMLand – Waiting to break away from its consolidation.

Chart 2: UEMLAND 5148, chart from 2/06/2009 to 24/09/2009.

As indicated by A, UEMLand Bollinger Bands contracted, suggesting that the price of UEMland is consolidation, while also preparing for a new movement. Generally, it is the best time to apply the Bollinger Bands when price is consolidating in a sideways manner. It is because, the more the Bollinger Bands is contracting, the clearer the expansion signal.

When the Bollinger Bands Width re-expands, it suggests that the consolidation is over, thus a beginning of a new movement, and the direction of the new movement shall be determined by the relative position of price above or below the Bollinger Middle Band.

If the Bollinger Bands Width re-expands with price above the Bollinger Middle Band, it would be a bullish biased signal, and this signal has to be confirmed with a significant increased of volume. Thus a buy signal, and the first cut-loss point is usually the Bollinger Middle Band. If price should form an uptrend after the bullish Bollinger Bands signal, investors could switch to the 14, 21, 31 EMA as the uptrend trailing stop reference.

In the contrary, if the Bollinger Bands should expands with price below the Bollinger Middle Band, it would be a bearish biased signal. Currently, support for UEMLand is seen at RM 1.55 level, while the resistance is at RM 1.75 followed by a stronger resistance at RM 2.00 level.

Major Shareholders:
1 UEM GROUP BHD 1,873,053,712 Shares（77.14% ）
2 HSBC NOMS SB EXEMPT AN - MORGAN STANLEY & CO.INCORP 121,071,075 Shares（4.99% ）
3 EMPLOYEES PROVIDENT FUND BOARD 98,814,463 Shares（4.07% ）
4 CITIGROUP NOMS SB EXEMPT AN - MELLON BANK 12,679,693 Shares（0.52% ）
5 ALLIANCEGROUP NOMS SB PHEIM ASSET MGMT SB - EPF 8,549,250 Shares（0.35% ）

Latest Financial Highlight as at 30/6/2009：

PER	213.33Times	Dividend Yield	0%
Dividend		Dividend Yield	Net ProRatio
31/12/2008	0 sen	0%	14.50%

Table 2: Financial Highlights of UEMLand.

As shown on table 2, UEMLand has a PE (Price Earning Ratio) over 200 times, this suggests that the current price of UEMland is relatively high to its earning power. Meanwhile, due to insufficient track record, we can not judge whether it is suitable for long term holding, for it has never paid a dividend so far. Therefore, for the moment, a more suitable strategy is “Trading Play” for this counter.

Cutting Losses:
While determining buy signal is generally not too difficult for most investor, cutting loss is, on the hand, a tough decision to make. Especially for beginner traders, the idea to cut loss is hard to bare, and whenever there is a risk of cut loss in their trading plan, they wish to give up the trade. In fact, investor will only have to take their “Maximem Risk”, which is the difference between the latest support (cut-loss point) and their entry price, and it is generally below 10%. In other words, investors only have to honor their trading plan, as planned, and whenever the price is moving in their favorable direction, the risk will be reduced.

Conclusion:
In short, investors have to be flexible in analysis, by choosing the suitable indicator in difference market condition. When price is forming a Higher-low, the Exponential Moving Average is generally a good indicator to be an uptrend support as well as the trailing stop reference. This way, investor will be able to gradually reduce their trading risk, and at the same time, avoid taking profit too early. When price is moving sideways, the Bollinger Bands is usually a better indicator to monitor the potential break out from the consolidation. When the Bollinger Bands re-expands, after a contraction, it would be a signal suggesting a beginning of a new movement after a consolidation.

Copyright © 2009 Straits Index (M) Sdn BhdImportant Disclaimer:These content provided by Straits Index (M) Sdn Bhd is solely for education and information purposes only, and do not suggest any investment advices. All information displayed are believed to be accurate and reliable. Interpretation of the data or analysis is at the reader's own risk. Straits Index (M) Sdn Bhd reserves the rights but obligations to update, admen, or even terminate the materials. 重要声明:以上的内容由海峡指数(马)私人有限公司提供,纯粹是教育性质, 并不是任何的投资忠告。所有资料显示认为是准确和可靠的。对数据或分析的解释和用途是在于用户自己的风险。海峡指数(马)有限公司持有保留及义务更新,甚 至终止材料的权利。




Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/

Quarterly Earning Growth.

Last week, we mentioned using Price Earning Ratio to choose stocks; this week, let us take a look at the Quarterly Earning Growth, understanding how it is being calculated, the behavior of the earning growth, and some case studies.

Quarterly Earning Growth:
Quarterly Earning Growth is the comparison of the Earning Per Share between the latest quarterly EPS and the same quarterly EPS in the preceding financial year. This way, it shows whether the company is performing better in terms of earning comparing to last year's same quarter. If the Earning growth is negative, it means that the company is making less earning per share, or even a loss.

Seasonal:
The reason of calculating the Quarterly Earning Growth by comparing the current quarterly earning per share (EPS) with the preceding year quarterly EPS, is because most companies business are seasonal. For example, due to the year end and festive holidays, a retail company usually make more profit in the later part of the year than any other months of the year. Therefore, to find out whether this company profit performance is best to company the quarterly earning with the preceding year quarterly earning.

Standard in Quarterly Earning Growth:
It is insufficient to just study only the latest quarterly result. To understand a company's financial, one must analyze and compare the results by every quarter; thus understanding the company's earning behavior.

Some investors might ask, who much Growth is considered a good growth of Quarterly Earning? In reality, there is no standing in which what figure is the best. Analyzing the Earning growth should go with the price trend. If price is still moving on an uptrend, with the earning growth improving, that is usually a better time to invest. Contrary, when price is moving sideways or downtrend, negative earning growth will actually further dampen investors confidence. Nevertheless, investors should know that price usually move a head of any results (3 to 6 months ahead). Therefore, technical analysis is imperative to professional investors.

There is no perfect formula nor indicators in both Technical and Fundamental analysis. Investors who are lack of experienced generally like to know about a best indicator, the fastest, and the most accurate indicator to help them to pick stocks. Analysis should be well-rounded in many aspects, and therefore, no one should rely on any single indicator (be it PER, Dividend yield, or Earning Growth) in making any investment; and by understanding the behavior of the earning growth, investors shall have a better attitude in approaching different types of companies, and finally, entering a trade at the right timing with technical analysis.

Below are the Case Studies, by taking Earning Growth in to account.

Carotec

Figure 1:Carotec – 0076，Quarterly Ratio Table

As indicated by the A square, Carotec had a negative Earning growth started in the 30thof September, 2007, this indicates that the company earning per share is reduced. Then, the Earning Growth was -572% on the 30thof September, 2008, this indicates that the company is actually making losses. At the same time, price dropped severely (as indicated by B square). By understanding the behavior of the Quarterly earning growth, investors should decide what type of trading / investing strategy for this kind of counter: short term. However, this is kind of quarterly earning growth is not favorable to conservative investors.

Airasia

Figure 2: Airasia – 5099，Quarterly Ratio Table

As indicated by A, Airasia's quarterly earning growth was -359.21% on the 30thof September, 2008, this shows that the company is actually making losses. However, other than the two quarters of losses, most of the time, Airasia is making a profit. Nevertheless, due to the inconsistency of earning growth, price of Airasia also fluctuates highly as indicated by the B square.

Haio

Table 3: Haio – 7668，Quarterly Ratio Table.
As indicated by A square, Haio's Quarterly earning growth has been very consistent, with only some declined in the earning growth in the recent quarters. In other words, the company is making constant profit, thus this is more suitable for long term investors.

BAT

Figure 4: BAT – 4162，Quarterly Ratio Table

As indicated by A square, other than occasional declined in quarter earning growths, BAT is making consistent profit. In other words, BAT is making profit in every quarter and this is a fundamentally strong counter, thus the average fluctuate price is around RM 42. Due to the lower fluctuation of price, it is more suitable for long term and conservative investors.

Conclusion:
Price Earning Ratios, Dividend Yield, Earning Growth, etc, are important financial figures and ratio to understand the company's back ground. By understanding its back ground, investors will know whether this company is suitable for the type of investing strategy (long term or short term). With proper trading skills of Technical analysis, investors can pick the best timing for company suitable to their investing style.

Copyright © 2009 Straits Index (M) Sdn BhdImportant Disclaimer:These content provided by Straits Index (M) Sdn Bhd is solely for education and information purposes only, and do not suggest any investment advices. All information displayed are believed to be accurate and reliable. Interpretation of the data or analysis is at the reader's own risk. Straits Index (M) Sdn Bhd reserves the rights but obligations to update, admen, or even terminate the materials. 重要声明:以上的内容由海峡指数(马)私人有限公司提供,纯粹是教育性质, 并不是任何的投资忠告。所有资料显示认为是准确和可靠的。对数据或分析的解释和用途是在于用户自己的风险。海峡指数(马)有限公司持有保留及义务更新,甚 至终止材料的权利。




Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/

How to pick stock with Price Earning Ratio (PE)

Price Earning Ratio (PE) is an important financial ratio which investors often come across. What actually is PE telling us? This week, we shall discuss more about PE as well Leading PE, and how to pick stock by understanding its PE and the market PE.

Price Earning Ratio:

A rolling PE is the current stock price divided by the total earning per share of the rolling 4 quarters. If a company's PE is 10 times, it means that the current stock price is actually 10 times of its earning. Provided that the company earning remains unchanged, the company will earn the invested capital of investor in 10 years (cost).

Leading PE:
Leading PE is a different way of calculating PE, instead of rolling last 4 quarters, Leading PE uses the current stock price and divided by the annualized the current financial years' total earning per share.

Here is a comparison of normal PE and Leading PE:

	05'Q4	06'Q1	06'Q2	06'Q3	Current Price
Earning Per Share	-10sen	5sen	5sen	5sen	RM 1	PE	20times
Earning Per Share	-10sen	5sen	5sen	5sen	RM 1	Leading PE	5 time

Table 1: Comparison of PE and Leading PE.

Calculating PE:

Current stock price (RM1）÷ 4 Rolling quarters Earning Per Share ( -10sen + 5sen + 5sen + 5sen）= 20times.

Calculating Leading PE:

Current stock price (RM1）÷ [Current Financial Year's Earning + Annualized Earning Per Share ( Q1 5 sen Q2 5sen + Q3 5sen ) ÷3 ] = 5 times

From table 1, we can see that Leading PE reflects the latest company's performance, and if investors could combine both normal PE with Leading PE, he or she can see if the company is actually doing better in the current financial year. Thus knowing if the current stock price is relatively expensive or reasonable.

FBMKLCI PE and Market PE:

The FBMKLCI PE is an average PE of the 30 component stocks in by weightage their market capital, which reflects the relatively price level of the KLCI, while the Market PE is an average weightage of all counters listed by their market capital.

Generally, a healthy market PE is usually around 16 to 18 times, and during a bull run, market PE can be as high as 20 times. Currently, as at 10/09/2009, our market PE is around 21.37 times, and therefore, the price of the KLCI seems relatively higher. Of course, this is due to the bull run since April.

Despite many companies had announced better quarter result, the KLCI PE remains high because of the continuous rising of heavy weighted blue chip counters. This suggests that after breaking the 200-MA, the KLCI has been moving higher. Nevertheless, there are still some counters with a relatively lower PE, and investors will have to find these counters with lower PE and high dividend yield.

Stock with Lower PE does not totally mean cheap:

It may seem like stock with lower PE is generally cheaper, but it is not entirely true. Since PE is calculated with the relative of price and earning per share, and if the company's earning remain unchanged but its stock price is falling continuously, its PE will be lower. If investors are picking this stock at a lower PE level, it is likely that he might picked up this stock in a downtrend. In other words, when stock PE is low, it is important to study the trend, and we should avoid picking stocks during a downtrend.

A conservative approach in investing should choose stocks with lower PE, while waiting for the right timing by following technical analysis signals. This is to ensure that the stock picked is not too 'expensive' and yet, buying at the right trend. As for aggressive investors may not need to follow this method, for some times, some counters still have upside potential, despite their high PE.

Counters that has PE lower than the Market PE:

PBBANK- 1295

Chart 1: Public Bank chart from 21/05/09- 10/09/09.

Major Shareholders:
1 EMPLOYEES PROVIDENT FUND BOARD 430,013,864 shares （12.81% ）
2 SEKURITI PEJAL SB 103,724,186 shares （3.09% ）
3 SEKURITI PEJAL SB 97,670,500 shares （2.91% ）
4 KEPUNYAAN CHINTAMANI SB 67,919,531 shares （2.02% ）
5 CONSOLIDATED TEH HOLDINGS SB 58,770,687 shares （1.75% ）

Latest Quarterly Financial Result as at 30/6/2009：

PER	13.89 times	Dividend Yield	5.48%
Dividend		Dividend Yield	Net ProRatio
31/12/2008	55 sen	6.29%	24.58%
31/12/2007	75 sen	6.82%	22.22%
31/12/2006	60 sen	7.69%	22.89%
31/12/2005	55 sen	8.66%	24.50%
31/12/2004	90 sen	12.68%	25.11%

BJTOTO 1562

Chart 2: Bjtoto, chart from 21/05/09- 10/09/09.

Major Shareholders:
1 HSBC NOM-EX AN-HSBC (M) TRUSTEE BHD 268,348,624 shares（21.37% ）
2 DB (M) (AS)-DEUTSCHE BANK AG LONDON 54,731,000 shares（4.36% ）
3 CIMSEC NOM PL SEC-VINCENT TAN CHEE YIOUN 50,372,550 shares（4.01% ）
4 CITIGROUP NOM (AS)-GOLDMAN SACHS INTL 39,278,400 shares（3.13% ）
5 CIMB GROUP NOM-BERJAYA LAND-B L CAPITAL SB 31,800,000 shares（2.53% ）

Latest Quarterly Financial Result as at 30/4/2009：

PER	13.21 times	Dividend Yield	5.84%
Dividend		Dividend Yield	Net ProRatio
30/04/2009	25.21 sen	5.06%	11.11%
30/04/2008	25.90 sen	5.26%	10.64%
30/04/2007	32.74 sen	7.31%	12.41%
30/04/2006	25.50 sen	5.23%	15.81%
30/04/2005	45 sen	11.08%	12.29%
30/04/2004	28 sen	6.39%	5.57%

GAB 3255

Chart 3: GAB chart from 21/05/09- 10/09/09.

Major Shareholders:
1. GAPL PL 154,069,900 shares（51.00% ）
2. MALAYSIA NOM-GREAT EASTERN LIFE ASSURANCE (M) BHD 10,217,480 shares（3.38% ）
3. HSBC (AS)-BNP PARIBAS SEC SVCES LUX-ABERDEEN GLOBAL 6,750,500 shares（2.23% ）
4. STATE STREET LONDON FUND XCP2-ABERDEEN ASIAN INC FUND LTD 3,700,000 shares（1.23% ）
5. MALAYSIA NOM-GREAT EASTERN LIFE ASSURANCE (M) BHD 2,301,320 shares（0.76% ）

Latest Quarterly Financial Result as at 30/6/2009：

PER	14.68 times	Dividend Yield	6.07%
Dividend		Dividend Yield	Net ProRatio
30/06/2009	41 sen	6.27%	11.05%
30/06/2008	44 sen	8.46%	10.54%
30/06/2007	45 sen	7.63%	10.50%
30/06/2006	42 sen	7.71%	13.13%
30/06/2005	41 sen	7.26%	11.34%
30/06/2004	38 sen	7.98%	11.11%

Above are some examples of counters with lower PE than the the market PE with high dividend yield.

Conclusion:
PE is one of the important financial ratio; it helps investors to avoid stocks that is relatively too expensive and find out some counters at a reasonable price. However, investors should never buy stock only based on lower PE, for he might have bought the stocks in its downtrend. Therefore, ideally, investors should pick stock with lower PE, and study its price trend, and only buy when technical analysis gives buy signals.

Copyright © 2009 Straits Index (M) Sdn BhdImportant Disclaimer:These content provided by Straits Index (M) Sdn Bhd is solely for education and information purposes only, and do not suggest any investment advices. All information displayed are believed to be accurate and reliable. Interpretation of the data or analysis is at the reader's own risk. Straits Index (M) Sdn Bhd reserves the rights but obligations to update, admen, or even terminate the materials. 重要声明:以上的内容由海峡指数(马)私人有限公司提供,纯粹是教育性质, 并不是任何的投资忠告。所有资料显示认为是准确和可靠的。对数据或分析的解释和用途是在于用户自己的风险。海峡指数(马)有限公司持有保留及义务更新,甚 至终止材料的权利。




Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/

Buy on Signal

Currently, the KLCI is consolidating after a brief technical correction, with low market volume, and at the same time, the regional markets are also having technical correction. Therefore, under the current circumstances, the market does not provide the ideal condition for investing. As a result, what strategy should investors be using? We shall take a look at 3 individual counter's case studies, and also how to “Buy on Signal” on these counters.

The idea of “Buy on Signal” is simple, which means investors should only start buying once the chart or indicator shows a positive signal, and also apply a proper trailing stop method. In other words, investors should only buy a stock if the stock shows a potential formation of an uptrend. Nonetheless, for those aggressive investors, they can choose to pick stocks that are on the rebound, as short term trading, and this usually higher in risk, not suitable for conservative investors.

The Current Market:

Chart 1: KLCI chart from 14/05/09 to 3/09/09.

As indicated by A, the KLCI was resisted near the 1200 psychological level, and entered a consolidation, forming a short term downtrend line L1. Fortunately, the Bollinger Bands was contracting, thus suggesting that the KLCI short term downtrend has temporary paused, and is now consolidating for yet another new movement.

Meanwhile, the KLCI is still supported by the 14, 21, 31 EMA, which is a longer term support line. This suggests that the KLCI long term trend is still positive. In other words, provided that the KLCI is still supported by the 14, 21, 31 EMA, there is still a chance for the KLCI to resume its uptrend. In order for the KLCI to resume its uptrend, it must break above the L1 downtrend line with the following criteria:
(1) Volume breaking and maintaining above the 40-day VMA.
(2) The Bollinger Band re-expansion with the KLCI above the Bollinger Middle Band.

Practical Case Studies:
Below are 3 KLCI component counters for this week's case studies, let's examine how one should "Buy on Signal".

Chart 2: AMMB - 1015, chart from 14/05/09 to 3/09/09.

As shown on chart 2, AMMB price formed T1 short term downtrend line, suggesting the short term movement is on the negative side. However, the Bollinger Bands is contracting, and therefore, the short term downtrend is temporary at a pause while consolidating for a new movement. If price of AMMB could break above the T1 line, with substantial volume increased, it would have a chance to break away from the short term downtrend movement.

Meanwhile, investors should monitor the Bollinger Bands to confirm the next signal. If the Bollinger Bands should re-expands with price above the Bollinger middle band, it would be a buy signal (As indicated by A), and the first cut-loss point is at RM 4.00 level. On the other hand, if the Bollinger Bands should re-expands with the price of AMMB remains below the Bollinger middle band, it would be a sell signal.

Chart 3: Genm - 4715, chart from 14/05/09 to 3/09/09.

As indicated by A, price of GENM rebounded on Thursday (3/09/09), breaking above the T1 short term downtrend line. This suggests that it is breaking away from the downtrend movement,. Meanwhile, as price of GENM is breaking above the T1 line, the Bollinger Bands also expanded, with price of GENM above the Bollinger Middle band. This suggests a bullish signal, with a first cut loss point at RM 2.70 level. If the Bollinger bands should continue to expand with price above the middle band, the bullish biased movement of GENM is expected to continue until the Bollinger bands should contract again.

Chart 4: Maybank - 1155, chart from 14/05/09 to 3/09/09.

As shown on chart 4, Maybank price is testing the T1 short term downtrend line. If price of Maybank could break above the T1 downtrend line, it would break away from the downtrend movement. However, it does not mean that it would form an uptrend, unless the Bollinger Bands re-expands with the price of Maybank above the Bollinger middle band. Nevertheless, if the Bollinger bands should expands with price above the middle band, it would be a buy signal, with a first cut loss point at RM 6.10 level. and of course, the buy signal has to be confirmed by a substantial increase of volume.

Transition in becoming a professional investor:

After reading the above case studies, investors might feel confused, for the idea of "Buy on Signal" contradicts with the basic fundamental of 'buy low sell high'. To most investors, it is not natural, thus harder to accept. In the process of learning, investors feeling confused is because he or she has not found his or her own style of investing, (aggressive or conservative, long term or short term). It is the worst thing for investors to chance his or her mind set from a short term investors to a long term investor after making a loss, and refuse to cut loss. As a result, they are holding on a losing positions, even until the loss is unbearable.

To break away from the average mind set of "Buy low, sell high", investors must break above the bottle neck, and the transition from an average investor to a professional investors is unavoidable; just like going through elementary school, and eventually graduating from College. There is not crash course, nor easy money making course to make you a successful investor, it requires time, efforts, and lots of studies, and a correct mind set and attitude, not to mention the experience, and then, only will he or she has a chance to succeed.

Conclusion:
To become a professional investor (or trader), investors must patiently waiting for the signal, and only "Buy on Signal", never buy too early because of the price is low. Finally, with a proper attitude and careful trading plan, together with the skill of analysis while following the broad market trend, and at the same time, knowing one's own trading position and objective, you will be on your way to becoming a professional investor one day.

Copyright © 2009 Straits Index (M) Sdn BhdImportant Disclaimer:These content provided by Straits Index (M) Sdn Bhd is solely for education and information purposes only, and do not suggest any investment advices. All information displayed are believed to be accurate and reliable. Interpretation of the data or analysis is at the reader's own risk. Straits Index (M) Sdn Bhd reserves the rights but obligations to update, admen, or even terminate the materials. 重要声明:以上的内容由海峡指数(马)私人有限公司提供,纯粹是教育性质, 并不是任何的投资忠告。所有资料显示认为是准确和可靠的。对数据或分析的解释和用途是在于用户自己的风险。海峡指数(马)有限公司持有保留及义务更新,甚 至终止材料的权利。




Source : WinChart, Straits Index (M) Sdn Bhd http://www.straitsindex.com/

Catching Rebound.

The KLCI is consolidating with low market volume, it is really not easy for investors to make profit from the quiet market. Conservative and long term investor tends to avoid technical rebound but as for short term traders, a technical rebound provide a chance of a short term trading opportunity. This week, we shall discuss on factors on short term trading play.

What is a Technical Rebound?
A technical rebound is a rebound of price during a downtrend, or after an abrupt selling. The main reason of a technical rebound is because of bargain hunting, where buyers are afraid to miss the short term trading opportunity and willing to buy at a higher seller's price.

Despite the price rebound due to bargain hunting, technical rebound at a downtrend is different from a rebound during an uptrend. (Please refer to chart 1)

Comparison of rebounds during Up and Downtrend.

Chart 1: KNM – 7164, chart from 5/10/2007 to 27/03/2008.

As indicated by the T1 uptrend line, arrow A, B, and C, are the rebound above the uptrend line, thus suggesting a rebound of price to resume its uptrend movement. If an investor is buying with A, B, and C rebound, he is buying into a uptrend. Contrary, T2 is a downtrend, and arrow D, E, and F are technical rebound during a downtrend. Notice that after the rebound of D, E, and F, price failed to break away from the downtrend, but resume its downtrend movement, even making new lows. Therefore, an attempt to at D, E, and F are only meant for short term trading for it is against the trend.

Advantages and Disadvantages of a Technical Rebound:
For a skillful trader who understand the behavior or a technical rebound, coupled with experience, he or she could take advantages of the short term technical rebound, making quick profit without following a major trend. However, the risk in trading on rebound is still high and therefore, a short term trading play should always associated with a cut-loss plan.

Indicator reference of a technical rebound:
Bollinger Bands Pull-back effect:
After a sharp fall of price breaking below the Bollinger lower band, investors could monitor the price for a possible rebound. When price stopped falling and started to rebound, it is a beginning of a pull-back effect, and the target of the pull-back effect is at the Bollinger Middle Band. Short term trading could speculate the pull-back effect with a proper trading plan.

Due to the high risk nature of trading at rebound, investors must carefully study the market condition and also the upside room between the rebounding price and the Bollinger Middle Band, to make sure that the upside potential is sufficient or else, it is not worth speculating on the pull-back effect. (Refer to Chart 2)

Chart 2: Petra – 7180, chart from 8/05/2009 to 27/08/2009.

As indicated by A, price of Petra dropped sharply, breaking below the Bollinger lower band, and therefore, suggested that the selling was over-sold, thus a good chance of a pull-back effect as a form of technical rebound. Short term trading could buy at the first day of a rebound with the latest low (RM 2.46) as the cut-loss point. Generally, the first target of a pull-back effect is at the Bollinger Middle Band, and if price should break above the Bollinger Middle Band, then only there is a chance of Petra to regain its strength. On the other hand, if price should resisted by the Bollinger Middle Band, it would be a signal to take profit.

Stochastic breaking above 30% and 50%:
The Stochastic is a short term indicator to help catching early rebound signals. When the Stochastic rises and break above 30% and 50% level, it suggests that the price is rebounding, a beginning of a technical rebound. This can be viewed as a short term trading signal, provided that investors is taking the recent low as the cut-loss point. (Study Chart 3)

Chart 3: Tebrau – 1589, chart from 8/05/2009 to 27/08/2009.

As indicated by A, the Stochastic rose and broke above 30% and 50% level, suggested a beginning of a technical rebound, thus a short term trading opportunity for short term trader. As indicated by B, the Stochastic fell below 70% level, suggesting that the short term movement of Tebrau was weakening, thus a signal to take profit.

As circled at C, the Stochastic is now below 10%, suggesting that the price of Tebrau is due for yet another technical rebound. However, investors should monitor the Stochastic, and the Stochastic has to break above 30% and 50% level to signal a beginning of a technical rebound, and then, the first cut-loss point will be at RM 0.70 level.

MACD histogram Rounding Bottom:

Chart 4: MMCCorp – 2194, from 8/05/2009 to 27/08/2009.

As indicated by A, the MACD histogram of MMC Corp formed a Rounding Bottom, suggesting that the price of MMC Corp is having a technical rebound. If investor should decide to buy for short term trading based on this signal, the first cut-loss point is at RM 2.26 level. If the MACD histogram should continue rising, the technical rebound is expected to continue until the MACD histogram should form a Rounding Top.

Short term trading signals:
Since these short term trading signals are mostly from Secondary Indicator, and when the trading signal is triggered, it has not been confirmed by the Bollinger Bands bullish signal, thus a trading signal against the trend. Therefore, short term trader should always have a trading plan with a cut-loss point, and knowing his maximum loss before deciding to take the short term traders.

Conclusion:
In conclusion, short term trading play is a high risk trading method, but if done skillfully, short term traders could obtain a quick profit from a short term rebound. Therefore, it requires professional skills of technical analysis and experience, and it is not suitable for long term nor conservative investors.

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