How should one make decision when there is a conflict of signal? Should investors react to the short term indicator signal or should they stick with the long term signal? In reality, there are many short term movement in a long term trend, and every short term correction could means a short term correction, or mark an end to the long term uptrend.
This is the idea mentioned in the Dow Theory, in which a major wave should have minor ripples, which reflect to the short term corrections during a long term trend. The difference between long term and short term signals are actually not conflicting, but rather a natural characteristic of trend. Therefore, investors must differentiate the importance of Primary and Secondary indicators, and apply them by understanding the long term and short term movement signals, then making their investment plan of buying, selling, or topping up.
Chart 1: E&O – 3417, chart from 21/1/2009 to 4/11/2009.
As shown on chart 1, during the uptrend of E&O, there were many short term corrections, but price managed to resume its uptrend after these correction, thus, forming an long term uptrend. As indicated by box A, and box B, some early reversal signal can be spotted by using short term indicator like the Stochastic. However, it is important not to react to the Stochastic signal too quickly for investor might be buying too early or taking profit too early, and missing the potential of long term uptrend. Study Chart 2 and Chart 3 for details.
Box A:
Chart 2: E&O, chart from 20/1/2009 to 23/3/2009 (Taken from Chart 1 Box A)
| Indication | Remarks |
| A | With the Stochastic below 30% level, it showed a short term bearish signal, thus not suitable for buying. |
| B | Despite the weakening short term signal, the Bollinger Bands was contracting, suggesting that price was consolidating while preparing for a new movement. Therefore, it would reveal its new movement once the Bollinger Bands re-expands. Meanwhile, when the Bollinger Bands is contracting, Secondary indicators signal (for example the MACD, Stochastic, RSI etc) can be over sensitive, and therefore, it is important to always confirm these signals with Primary indicators, such as the Bollinger Bands and the Moving Average. |
| C | The Bollinger Bands re-expanded, with price above the Bollinger Middle Band, thus showing a bullish biased signal. At the same time, the Stochastic also break above 30% level, breaking away from the short term bearish region, suggesting an improvement short term movement. |
Box B:
| Indication | Remarks |
| A | The Stochastic broke below 70% level, suggesting an end to the short term bullish signal. It also mean a beginning of a technical correction. However, the Bollinger Bands was contracting, and therefore, it has not confirmed the weakening signal of the Stochastic. But, with the Stochastic giving an early warning signal, at least investors could mentally prepare, or plan for a technical correction, or even a risk of a bearish reversal. |
| B | The Bollinger Bands re-expanded with price staying below the Bollinger Middle Band, and therefore, confirming a negative movement signal. |
| C | The Stochastic returned to above 70% level, giving yet another short term bullish signal, while the Bollinger Bands was still contracting, thus it has not confirmed the short term bullish signal. |
| D | The Bollinger Bands contracts, giving no confirmation to the short term bullish signal of the Stochastic. |
| E | The Bollinger Bands re-expands, with price below the Bollinger Middle Band, and at the same time, the Stochastic also broke below 30% level, entering the short term bearish region. Therefore, both the Stochastic as well as the Bollinger Bands are showing bearish signal. |
Chart 4: E&O Long term uptrend chart with 14, 21, 31 EMA.
As shown on Chart 4, when price of E&O is forming an uptrend, investors can apply the 14, 21, 31 EMA as the uptrend dynamic support as well as the trailing stop reference. Generally, for investors who had bought the stock in this uptrend, and when price has risen, investors should pay attention to the short term correction signal, but should not react too quickly by selling their positions. This is because as long as the price is still supported by the 14, 21, 31 EAM, the uptrend is still intact, and there could be more upside potential. Until the price should break below the rising EMA, it suggests that the uptrend has ended.
This week's Case Studies:
Chart 5: Zelan – 2283, chart from 8/6/2009 to 5/11/2009.
As indicated by A, the Bollinger Bands of Zelan contracted 10%, suggesting that price is consolidating while preparing for a new movement. When the Bollinger Bands should re-expands, and if price should stay above the Bollinger Bands, it would be a bullish signal, and the Bollinger Middle Band shall serve as the dynamic support for the upside movement. On the other hand, when the Bollinger Bands re-expands with price below the Bollinger Middle Band, it would be a bearish signal.
As indicated by B, the Stochastic is still staying around 50% level, suggesting that the short term movement of Zelan is still trendless. Generally, the Stochastic has to break above 70% and remain above 70% level to give a short term bullish signal. If the Stochastic should break below 30% level, it would be a short term bearish signal.
If the Bollinger Bands should show a bullish signal, the most ideal situation would be a substantial increased of volume to confirm such bullish signal. Because the increase of volume suggests more inflow of fresh capital to absorb the selling pressure. This is likely to help sustaining the uptrend. Resistance for Zelan is at RM0.95 and RM 0.99 WinChart Automatic Fibonacci Retracement while the support is at RM 0.86 WinChart Automatic Fibonacci Retracement.
Chart 6: SPSETIA – 8664, chart from 14/07/2009 to 5/11/2009.
As indicated by A, Bollinger Bands of Spsetia contracted 14%, suggesting that price is consolidating, while preparing for a new movement. If the Bollinger Bands should re-expand, it would be an end to the consolidation and a beginning of a new movement, and the direction of the new movement is determined by the relative position of price above or below the Bollinger Middle Band.
In other words, when the Bollinger Bands re-expands, with price above the Bollinger Middle Band, it would be a bullish signal, and the Bollinger Middle Band shall serve as the dynamic support as well as the trailing stop reference; and the best confirmation would be a substantial increased of volume. (Study C). On the other hand, when the Bollinger Bands re-expands with price below the Bollinger Middle Band, it would be a bearish signal.
If investor would like to be prepare slightly earlier, they can observe the chances of the Stochastic. As indicated by B, the Stochastic is now in 50% level. If the Stochastic should break above 70% level, it would be an early signal suggesting that the price is gaining strength, while entering the short term bullish movement. On the other hand, if the Stochastic should break below 30% level, it would be a short term bearish signal. Resistance for Spsetia is at RM 4.00 while the support is seen at RM 3.77 WinChart Automatic Fibonacci Retracement.
Conclusion:
By fully understanding the relationship between long term and short term movement and indicators meaning, these signal should be complimenting rather than conflicting. Although there is no 100% sure of indicator signal, it is still very helpful for investors to be prepare for the possible out comes by getting a feel of the changes of long term and short term movement, thus able to react on time according to the changes of trend.
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。
