Maybank IB Understanding technical analysis 24 September 2011 by Lee Cheng Hooi Slide 1 of 40
Why technical analysis? 1) Market action discounts everything 2) Prices move in trends 3) History repeats itself Slide 2 of 40
Talk contents 1) My introduction & story of TA 2) Tools of the TA trade (MBB Platform) 3) Examples of chart success Slide 3 of 40
Talk contents 1) My introduction & story of TA 2) Tools of the TA trade 3) Examples of chart success Slide 4 of 40
Talk contents 1) My introduction & story of TA 2) Tools of the TA trade 3) Examples of chart success Slide 5 of 40
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Trend-lines Trend-lines are easily recognizable lines that traders draw on charts to connect a series of prices together. The resulting line is then used to give the trader a good idea of the direction in which an investment's value might move (Investopedia, Casey Murphy ) Understanding the direction of an underlying trend increases the probability of making a successful trade. Downward sloping trend-lines suggest an oversupply situation. Upward sloping trend-lines suggest that demand is higher then supply. Slide 8 of 40
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Fibonacci retracements 1) Based on the Fibonacci series of numbers (1/1/2/3/5/8/13/21/34/55/89/144/233/.) 2) Fibonacci retracement ratios are derived from 89/144 = 0.618, 55/144 = 0.382 and 34/144 = 0.236 3) Fibonacci extension ratios are the reciprocals of 0.618, 0.382 and 0.236. These are 1.618, 2.618 and 4.236. 4) Retracements mark areas for buying (or selling) for up-trends (or downtrends respectively). 5) Extensions mark target areas for up-trends (or downtrends) respectively. Slide 10 of 40
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Simple Moving Average - SMA A simple, or arithmetic, moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods - Investopedia Shorter-term MAs react faster than longer term MAs. Price bars closing above the SMA lines is bullish. Price bars closing below the SMA lines is bearish. When the shorter-term SMA line moves above the longer-term SMA line, this is called a Golden Cross. A reverse movement of the SMAis called a Dead Cross. A great trend following tool. Slide 12 of 40
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Exponential Moving Average - EMA A type of moving average that is similar to a simple moving average, except that more weight is given to the latest data Investopedia. The EMA lines will indicate average lines closer to the recent underlying price trends The 9 day EMA,12 day EMA and 26 day EMA lines are used to construct the MACD indicator. Another great trend-following tool. Slide 14 of 40
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Bollinger Bands John Bollinger, developed the technique of using a moving average with two trading bands above and below it. Bollinger Bands simply add and subtract a standard deviation calculation Investopedia. Standard deviation is a mathematical formula that measures volatility. Volatility = Risk Risk = Opportunity / Threat Bollinger Bands when volatile, will expand. They will contract when market moves into a tight trading range. Stock prices hitting the upper band suggest that the stock maybe overbought. Stock prices touching the lower band suggest an oversold environment. Slide 16 of 40
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Parabolic Indicator A technical analysis strategy that uses a trailing stop and reverse method called "SAR," (or stop-and-reverse), to determine good exit and entry points Investopedia. The Parabolic SAR is used by many traders to determine the direction of an asset's momentum. A dot placed below the price is deemed to be bullish, causing traders to expect the momentum to remain in the upward direction and vice versa. The Parabolic SAR is one of the easiest methods available for strategically setting stop-loss techniques. Whipsaw Parabolic SAR movement can occur and is risky to use in nontrending markets. Trend-following indicator. Slide 18 of 40
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MACD A trend-following momentum indicator that shows the relationship between two moving averages of prices - Investopedia Crossovers - As shown in the chart above, when the MACD falls below the signal line, it is a bearish signal, which indicates that it may be time to sell. - Investopedia Divergence - When the security price diverges from the MACD, It signals the end of the current trend. - Investopedia Dramatic rise - When the shorter moving average pulls away from the longer-term moving average, it is a signal that the security is overbought and will soon return to normal levels. - Investopedia Has 3 components (2 lines & a histogram). A trend-following tool. Slide 20 of 40
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Stochastic A technical momentum indicator that compares a security's closing price to its price range over a given time period - Investopedia. The theory behind this indicator is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low Investopedia. This momentum indicator shows an investor if the stock is overbought or is oversold. Range of the Stochastic is between 0 and 100. Overbought range can be in the 70/75 to 80-zone. Oversold range can be in the 30/25 to 20-zone. Slide 22 of 40
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On Balance Volume - OBV A method used in technical analysis to detect momentum, the calculation of which relates volume to price change Investopedia. This indicator attempts to identify accumulation activities which attempts to identify the underlying supply and demand of either large buying activities or large selling activities. Upward sloping OBV confirms an uptrend. Downward sloping OBV confirms a downtrend. Downward sloping OBV while price trend is up indicates that smart traders are exiting the stock and the price trend may reverse. The reverse is also true. Slide 24 of 40
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Relative Strength Index- RSI A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset - Investopedia RSI above 70 (can be 75 or 80 too) level indicate an overbought environment. This suggests the good possibility of a pullback. RSI below 30 (can be 25 or 20 too) indicate an oversold situation. This suggest a possible rebound in prices. A trader using RSI should be aware that large surges and drops in the price of an asset will affect the RSI by creating false buy or sell signals. The RSI is best used as a valuable complement to other stock-picking tools Investopedia. A non-trending indicator and is between 0 to 100. Slide 26 of 40
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Volume The number of shares or contracts traded in a security or an entire market during a given period of time Investopedia. Volume is an important indicator in technical analysis as it is used to measure the worth of a market move. If the markets have made strong price move either up or down, the perceived strength of that move depends on the volume for that period. The higher the volume during that price move, the more significant the move. Investopedia. It may be worthwhile to put a moving average on the volume. When prices surge, it must be accompanied with volume. This is easily depicted on the charts. Slide 28 of 40
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Advanced reports Slide 30 of 40
Advanced reports Slide 31 of 40
Talk contents 1) My introduction & story of TA 2) Tools of the TA trade (MBB Platform) 3) Examples of chart success Slide 32 of 40
Sample of our 12 July 2011 report Slide 33 of 40
The FBM KLCI was at the highest point Slide 34 of 40
Now we are much lower levels Slide 35 of 40
Stock pick - CUSCAPI Slide 36 of 40
CUSCAPI trebled (3.6x) in price Slide 37 of 40
My contact details Lee Cheng Hooi VP & Head of Retail Research Tel: 03-2297 8694 DL BB: 012-271 8729 Email: chenghooi.lee@maybank-ib.com Slide 38 of 40
Disclaimer This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each security s price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Berhad and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Berhad and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Berhad, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forward-looking statements. Maybank Investment Bank Berhad expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Berhad's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Berhad and Maybank Investment Bank Berhad accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Published / Printed by Maybank Investment Bank Berhad (15938-H) (Formerly known as Aseambankers Malaysia Berhad) (A Participating Organisation of Bursa Malaysia Securities Berhad) 33rd Floor, Menara Maybank, 100 Jalan Tun Perak, 50050 Kuala Lumpur Tel: (603) 2059 1888; Fax: (603) 2078 4194 Stockbroking Business: Level 8, Tower C, Dataran Maybank, No.1, Jalan Maarof 59000 Kuala Lumpur Tel: (603) 2297 8888; Fax: (603) 2282 5136 http://www.maybank-ib.com Slide 39 of 40
Thank you Slide 40 of 40