Chart 1: KLCI chart breaking T2 uptrend line.
Chart 2: KNM - 7164, chart from 4/3/2009 to 265/6/2009.
Is it too late to take profit now?
Many beginner investors will only consider to take profit after price drop about 30%. This is because an inexperienced investor might have ignored the effect of the KLCI correction. For example, the KLCI dropped only 5% from its recent high of 1095 points in its technical correction, but many counters had dropped more than 30% in their technical correction. (Compare Chart 1 and Chart 2). It is actually too late to take profit. However, most of the time, after a sharp correction, price pull-back or rebound as a result of over-sold. For those investors who had missed the first selling signal, the rebound can be a second chance for them to take profit, but not at the same level.
These investors worried that if they had sold their position during a technical correction, and if later price continue to rally and breaking new high, and they would have missed the rally. It is possible that price could rally again, and therefore, when price should break new higher, (KLCI above 1095 with strong volume), it would be another buy signal, and investors could reposition themselves.
Should investors accumulate high dividend stocks?
When price drops, the PER of the counter will drop, and if the company is paying dividend as well, its dividend yield will also increase as a result of price drop. This might look attractive to those fundamental investors, but is it a good move to accumulate high-yield stocks during a downtrend? In fact, every investment style has their own Pros and Cons. But still, before anyone accumulate any high-yield stock, it is important to study the following factor :
Chart 3: Public Bank - 1295, chart from 22/4/08 to 31/3/2009, losing RM 5.00 or 42%.
Chart 4: KLCI chart from 22/4/2008 to 31/3/2009, losing 500 points or RM 38.6%.
As shown on Chart 3, price of Public Bank fell together with the KLCI, losing RM 5.00 or 42% between May of 2008 to March of 2009. Even though Public Bank paid out a total dividend of RM 0.55 during this period, the dividend could not cover the capital lost of RM 5.00. This clearly shows that accumulating during a downtrend, despite a high-yield stock, may not be the wisest choice of investment. A more suitable way would be to buy these high-yield stock when the KLCI rebound and reverses.
What about Contra or short term speculating?
For investors who can handle a higher short term trading risk, it is certainly an options to trade as the price rebound after an over-sold condition. However, this method is not suitable for all investors, and to trade for short term, investors have to have time to monitor the short term price swing, as well as an absolute sound short term trading plan, and if price should begin to fall, it is a signal to sell.
In addition to that, not every counter is suitable for short term trading. A counter suitable for short term trading must be liquid, and these are usually the most active counters on the board. Another criteria is its daily fluctuation, this is to make sure it fluctuates enough to yield a tradable difference of price. (Study Chart 5 and 6)
Chart 5: UEMland - 5148, intra-day chart on 22/6/2009.
Chart 6: UEMLand - 5148 chart showing an over-sold signal.
As shown on Chart 5, UEMland daily price fluctuates from its low up to 12sens. As shown on chart 6, the circle A indicates that price of UEMland has broken below the 20-day Bollinger lower band, which is an over-sold signal. Short term trader could take this opportunity to buy for a good chance of a rebound as a result of a pullback effect.
The rule of thumb for short term trading is to cut loss or take profit as price turns south. It is absolutely crucial that short term investors must have a strong trading mindset and should always stick to their strict rule of trading. Most often, when price begin to fall and many short term investors find it difficult to cut loss or they had missed their profit taking signal, and as a result, they hold on to the stock, changing their mindset from short term trading to long term holding. Most likely, this will result in suffering huge losses.
Breaking even? Your last choice.
When investors begin to lose money, their confident is lower, thus changing their original trading objective from making money to breaking even. Therefore, all losers who are holding in losses, have nothing but only hopes, not hopes to make money, but a pathetic hope just to break even! Instead of learning how to break-even, why not avoid it buy properly applying a Trailing Stop method when buying any stocks? For example, using uptrend line, 14, 21, 31 EMA, Bollinger middle band, chart patterns like Ascending Wedges, or even the Weekly MACD histogram signal to spot for warning signals.
For trend trading, this might not be the best time to invest, because the broad market is still only having a technical rebound after a sharp correction. Unless the market volume should pick up and stay above the 40-day Volume Moving Average and the re-expansion of the Bollinger Bands width with the KLCI above the middle band; only then, the KLCI might have a chance to regain its strength and it could resume its uptrend.
Nevertheless, investors should honor their trailing stop method, and cut loss or take profit as price break below the uptrend line. Failing to act upon the trading plan will result in huge losses.
Chart 7: DRBHCOM - 1619, chart from 1996 to recent.
As shown on Chart 7, price of DRBHCOM once touched RM 10.20 in November 1996, but until now, it has never returned to the same level, after so many years, not to mention that in between this period, our local market has gone through a few bull runs, namely the 1999, 2003, and 2007, and the 2008 peak of 1524.69 points. Despite the bull runs, price of DRBHCOM failed to return to its peak, not even half of it. From 1997 till now, DRBHCOM had paid a total dividend of RM0.353 sen. However, the dividend received is nothing comparing to the capita lost.
Conclusion:
The recent technical rebound has different meaning to different investors. For those who are looking for trend investing, this might not be the best timing yet, so as the long-term high-yield investors. However, for short term traders, this might be a trading opportunity, but short term investors must have a strong trading mind-set, and be ready to close position if price should begin to fall. Never change the mind-set of short term trading to long term investing when price should form a downtrend. In short, when price breaks below an uptrend, it is always wise to take profit, for you can always buy back the shares when price should break above the downtrend line in the future.
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