Chart pattern and trend lines are definitely the most important aspect of Technical Analysis, followed by Primary Indicators and then Secondary Indicators. The study of chart patterns and primary indicators are usually more accurate, but it can be tricky sometimes, and therefore, sometimes analysts make use of Secondary indicators to reinforce their analysis.
| Primary Indicators: 5. WinChart SRS | Secondary Indicators: 2. MACD 4. Stochastic 5. DMI |
Other than the above mentioned indicators, there are still countless of technical indicators available in the market. However, we strongly believe that the simplest indicators or method of analysis is still the best. Because, ultimately, it is the apply of analysis that matters, but the complex theory behind it. Further more, many of these technical indicator are having co-linear effect. Therefore, it is important to just master a simple method of analysis.
Bollinger Bands and the Moving Average are widely used Primary Indicators, for they are closely related to the price movement, and as a result, their signals are usually direct, and clear. However, despite both being Primary Indicator, they have different advantages and weakness; the Bollinger Bands is suitable when price is consolidating, so that analysts can monitor the end of a consolidation and a beginning of a new movement. However, the Moving Average is more suitable when applying as a dynamic support of an uptrend, or an dynamic resistance of a downtrend, an as well as a trailing stop method.
We shall take a look at the following case study on Bollinger Bands and the Moving Average.
Airasia - 5099 – Preparing for a new movement.
Chart 1: AirAsia – 5099, chart from 10/06/2009 to 28/10/2009.
As shown on chart 1, price of AirAsia started consolidating in October 2009, and the contraction of the Bollinger Bands also confirmed the consolidation signal. As the Bollinger Bands contracts, the volatility of Airasia also decreases, this suggests that not only the price is consolidating, it is also preparing a new movement, and the direction of the new movement shall only be revealed once the Bollinger Bands re-expands.
Technically speaking, when the volatility of price is low, it is the best time to apply the Bollinger Bands, because when the Bollinger Bands is narrowing, its expansion signal will be much clearer, and firmer. This is an advantage for investors who understand the advantage of the Bollinger Bands.
As indicated by A, the Bollinger Bands re-expanded after consolidating for about 1 month. This suggests that the consolidation of Airasia is ended. However, because price of Airasia is now below the Bollinger Middle Band, the expansion of the Bollinger Bands suggests a bearish movement, and the Bollinger Middle Band shall serve as the immediate dynamic resistance.
The immediate outlook for Airasia is negative biased, and therefore, unless price of Airasia could break above the Bollinger Middle Band in the near future, the bearish biased movement is likely to carry on if the Bollinger Bands should continue to expand. In other words, this is a signal to cut-loss. Support for Airasia is now at RM1.33 and RM 1.27 WinChart Automatic Fibonacci Retracement, while the resistance are found at RM 1.39 and RM 1.46 WinChart Automatic Fibonacci Retracement.
Latest Financial Summary as at 30/6/2009：
| Leading PER | 4.52 times | Dividend Yield | 0.00% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 0 sen | 0% | -17.87% |
| 31/12/2007 | 0 sen | 0% | 28.45% |
| 31/12/2006 | 0 sen | 0% | 31.07% |
| 31/12/2005 | 0 sen | 0% | 10.25% |
| 31/12/2004 | 0 sen | 0% | 12.50% |
Table 1: Financial Summary of AirAsia.
As shown on table 1, there were no dividend paid out for the last 5 years, and therefore, AirAsia is not a high yield stock, thus not a suitable counter for dividend income nor long term investors. It is more suitable for position trading.
Axiata – 6888 – Downtrend formation.
Chart 2: Axiata – 6888, chart from 11/06/2009 to 28/10/2009.
As indicated by A, price of Axiata broke below the 14, 21, 31 EMA, but rebounded near the RM 3.00 support level, returning to above the 14, 21, 31 EMA without forming a downtrend. However, as indicated by B, price of Axiata broke below the 14, 21, 31 EMA again on the 22nd of October, 2009, and it also broke below the RM 3.00 WinChart Automatic Fibonacci Retracement; therefore, it forms a downtrend.
Based on this example, it is the best time to apply the 14, 21, 31 EMA. This is because when price is trending, (up or down), the Moving Average can serve as the dynamic support or the dynamic resistance. When price is trending up, the Moving Average can also serve as the Trailing Stop reference. However, when price is trend down, it would be a dynamic resistance, and investors should avoid buying when price is trending below the falling 14, 21, 31 EMA.
As shown on the chart above, the characteristic of a downtrend is that price constantly staying below the falling 14, 21, 31 EMA. If price should rebound, but failed to break above the falling 14, 21, 31 EMA, the downtrend is likely to continue.
In short, as long as the price is still resisted by the 14, 21, 31 EMA, the downtrend remains intact, and investors should not attempt to buy, because this is buying against the downtrend. Nevertheless, support for Axiata is at RM 2.83 WinChart Automatic Fibonacci Retracement while the resistance is at RM 3.00 followed by the 14, 21, 31 EMA.
Latest Financial Summary as at 30/6/2009：
| Leading PER | 16.22 times | Dividend Yield | 0.00% |
| Dividend | Dividend Yield | Net Profit Ratio | |
| 31/12/2008 | 0 sen | 0.00% | 4.39% |
Table 2: Financial Summary of Axiata.
Conclusion:
The Bollinger Bands and the Moving Average are both important Primary Indicator but both has its advantages and weakness. The Bollinger Bands is best used during a consolidation, to find out the beginning of a new movement, while the Moving Average is best used in a trending movement, as a dynamic support or dynamic resistance. It is crucial that investors to fully understand the usage between the Bollinger Bands and the Moving Average.
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