Characteristics of a Healthy Technical Correction:
1. Stock price to move sideways or low down side fluctuation.
If the stock price is moving sideways, those who just bought the shares are not suffering any huge losses, thus it will not hurt the market sentiment. Meanwhile, for those who are still waiting on the sidelines, they will slowly accept the stock price if the stock price stop falling further, therefore, as these new investors are buying, there is a better chance for the stock price to form a higher-low, thus a continuation of an uptrend.
2. Lower volume during a technical correction.
Every volume represent 1 buyer and 1 seller. If volume is low during a technical correction, it means that sellers are not selling abruptly, thus no panic selling. In other words, not many buyers are able to buy their shares too, and therefore, there is a good chance for the stock price to resume its uptrend after a low-volume technical correction.
3. Price supported by dynamic support.
Professional investors will have a trading plan using trailing stops method, for example using 14, 21, 31 EMA as dynamic support. Therefore, if price should rebound from the 14, 21, 31 EMA or other forms of dynamic supports, it means that the uptrend remains intact, thus a healthy technical correction. Generally, trend traders or investors are likely to top up their positions when stock price rebound from its dynamic support.
4. Stochastic remain above 70% level.
Other than price movement and volume analysis, analysts are using Stochastic as a reference too. Generally, during a healthy technical correction, the Stochastic should not fall below 70% level. However, in some cases, the Stochastic breaks below the 70% level but returned to above 70% level within the next two days. This is still acceptable for the Stochastic can be over-sensitive sometimes. It also means that the short term price movement has not turned bearish despite a technical correction. Therefore, when the Stochastic return to above 70% level, it is a signal suggesting the short term bullish biased movement is resuming.
5. Overall market sentiment and external factors.
Most of the time, individual stock movement is pretty much moving in tandem with the broad market such as our KLCI and regional markets. If after a technical correction, with the broad markets still staying in uptrend, there is a better chance for the stock price to continue its uptrend.
Chart 1: Lionind [4235] from 20/02/2009 to 24/04/2009.
Description:
A: After rising for around 2 weeks, the Stochastic reached 100%, thus suggesting a short term over-bought signal.
B: Price of Lionind having a technical correction, but in a low fluctuation manner (-5.3%).
C: Volume was substantially lower during the technical correction.
D: Price of Lionind precisely rebounded from the dynamic support, forming a higher-low, thus a signal to top-up positions or buy signal.
E: Stochastic broke below 70% level, but returned to above 70% level, suggesting a resume of the uptrend.
Technical Correction which ends the uptrend:
1. Sharp falling of stock price or forming an Inverted V shape pattern.
If the stock price should retreat sharply, many investor who are still holding their positions will suffer sharp losses, thus dampen the market sentiment. Meanwhile, the sharp fall of the stock price will also dampen the confident of those investors who are waiting on the sidelines, and without fresh buying interests, chances for the stock price to resume its uptrend is slim.
2. Huge volume during a price falling.
When price is falling with huge volume, it means that a lot of sellers are selling their shares at a lower price. Although more buyers are buying at lower price, each price transacted is lower than the previous one, thus the selling pressure is stronger than buying interests. (Study Chart 2).
3. Price breaks below dynamic support.
If price should break below the dynamic support (Exponential Moving Average or Bollinger Middle Band) after its technical correction, it means that the uptrend is likely to end, thus investors are funds maybe taking profit, therefore, chances for the price to resume its uptrend is slim. (Study Chart 3).
4. Stochastic breaks below 30%.
During a healthy technical correction, the Stochastic should stay above 70% level. If the Stochastic should break below 70% level but failed to return to above 70% level, and then breaking below 50% and 30% level, it would be a signal suggesting a short term price movement is turning weak, thus an end to the uptrend and beginning of a short term bearish movement signal. (Study Chart 3)
5. Broad markets turn weak.
If the broad markets are turning weaker as the individual stock price is having a technical correction, chances for the stock price to resume its uptrend is also reduced.
(Chart 2) Resort [4715], from 29/09/2008 to 26/12/2009.
Description:
As indicated by A, when price retreat, volume increased substantially (as indicated by B), suggesting a strong selling pressure, the stock price movement was mostly lower.
(Chart 3) Kinstel [5060], from 05/03/2008 to 09/07/2008.
Description:
A: Stock price retreated, technical correction, but managed to rebound from the dynamic support, continued its uptrend.
B: Technical correction again, but this time, breaking below the dynamic support, suggesting an end to the uptrend, thus a signal for profit taking, or cutting losses.
C: Stochastic entered below 30% level, after breaking below 70% level, entering a short term bearish movement.
As shown on chart 3, although volume did not increase substantially during a technical correction, price has broken below the dynamic support. It is important to note that during a down trend or a price fall, it does not need to have high volume to confirm the bearish signal. Generally, if price should continue falling with low volume, it means that the buying interest is still low. Therefore, if price should break below the dynamic support, with high or low volume, investors should carefully consider to cut-loss or to take profit.
Stocks currently having a technical correction:
| Stock | Code | Characteristic of the Technical Correction | |||
| Downside Fluctuation | Volume | Dynamic Support | Stochastic | ||
| Lioncor | 3581 | -12.30% | Relatively Lower | Supported | Slightly below 70% |
| Resort | 4715 | -.9.40% | Relatively Higher | Supported | Below 70% |
| Proton | 5304 | -12.80% | Relatively Higher | Supported | Below 70% |
| TA | 4898 | -7.10% | Relatively Higher | Supported | Slightly below 70% |
| KNM | 7164 | -10.40% | Relatively Higher | Supported | Below 70% |
Most of the time, investors are not fully invested when stock price is rising in an uptrend. Therefore, investors are looking for a second entry during a technical correction. However, it is very risky to try to buy during a technical correction, and it is usually not suitable for conservative type of investors. Even aggressive investors would plan out a training plan before they speculate, just in case the stock price should break below the uptrend line or the dynamic support level. Therefore, the safer way is to buy when price rebound from the uptrend after its technical correction.
Conclusion:
A healthy uptrend must have healthy corrections, or else it is impossible for the price to stay on in its uptrend, unless it is being controlled. Understanding the characteristics of a healthy technical correction is very important for a skillful investor will be informed if he or she could identify a healthy technical correction from a correction that ends the uptrend.
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/
