Technical Analysis and Multiple Trendlines

As most of the readers of this blog knows, Im not fully into Technical Analysis. I like more 

1) the news (especially if my current disposition is that of a short-term to intermediate trader)

2) balance sheet and p&l statement, 

3) the caliber of the CEO and other executives of the company, 

4) the current price of the stock compared to its growth potential, 

5) and the inherent growth story of the firm 

to speak for themselves. 

I also try to make myself aware of foreign buying. 

But TA believers would say that the chart should be able to reflect all these. Meaning the sentiment on fundamental and management should all be in the chart. I dont agree. 

Within the chartists sphere, these have some weight on my buying or selling moves:

--the cup and handle patterns is based on a solid psychological nature of humans, so Im on the lookout for this pattern always. 

--simple moving averages at 50 (for short term) and exponential moving average at 150 or 200 (for intermediate). I also watch these because many chartists are supposed to buy (or sell) in droves when these are broken. We of course want to ride with them, and hopefully pluck some short-term profit. 

--RSI is okay as a guide if the increase or decrease is fairly gradual. A jerky increase up and down are more news or hype-based; RSI is invalidated in these cases. 

--spikes in volume are also very meaningful. 

--psychological supports and resistances (especially if the number converges with a moving average) also appear valid, especially on large-volume traded stocks 

--if i know i will have time to monitor short-term trading (where, win-or-lose, I intend to sell back the same position that I bought in  to 3 weeks), I also check candlesticks.  

One TA area that appears iffy to me is the turf of trendlines. 

A famous chartist getting paid for his analysis (selling subscription) was spouting last year that our index will reach 8500, solely because of the black, purple, and moss green trendlines that are supposed to be pointing upward of 8000. Those to me seem arbitrary, especially since the P/E of our index was already a very expensive 20+.

And then beginning on the sell-down last June, an infinite number of triangles and lines can be formed, almost at leisure. Could trendlines be nothing more than pastime for investors, as kids enjoy drawing sketches and figures on their play time?  

In any case the most optimist among us should be happy that chartists should be joining the buying today since there appears to be an upward channel that formed early this year (see the two short parallel lines on the far right of the chart below). 

Speaking if channels, TEL is supposed to be on an upward channel Oct 2012 to near July, but it was turned into a 'confirmed' downward channel since June 2013 to February 2014. But an upward channel can also be simultaneously from last November 2013 to present. So even with channels, there are multiple readings possible. 

Anyway, there's no use becoming snobbish of methods. I would agree that the best compromise is to choose a 'pet' based on present value and fundamentals (or 1 to 5 above), and then use TA to decide on the moment when to bet high. In short, choose a company that you will trust and then read some chicken intestines to reinforce the decision when to make big bets or... cut loss for that matter. 

Waiting and Hoping for Handles

Many of our favorites are overbought, and small-time investors like us, expectedly, are on the sidelines waiting for them to "cool down" before getting in again. In Technical Analysis parlance, this means that the RSI is already above 70. DNL for example is already hitting 85 and TA 75. Chartists want this to go down to a 'healthy' 50 or so for these stocks to resume an uptrend again.

If all goes according to plan, a familiar cup and handle pattern would also emerge. So this means that many are also waiting for the handle portion You should read up about it if you're not familiar with cup and handle.

I have unloaded completely DNL and BDO. Also, offloaded substantial MEG and TA, and a small amount of MBT. All of them green. The critical thing now is to know if a real handle will form and how deep a handle to wait for before getting in again.

References say that the handle downtrend shouldn't last longer than half-the-time of the previous uptrend. So, if DNL has been on the second half of the cup for 5 weeks, the downtrend should not last longer than 2.5 weeks.

The depth of the downtrend should ideally not be more than 25% of the cup's tip. So, if DNL peaked at around 7.1 from cup's bottom at 6.03--the handle's bottom should only be around 6.8.

Finally the volume should not be going up (preferably very small) during the downtrend of the handle.

I dont fully believe and subscribe to Technical Analysis as a whole, but the The RSI can be just a simple tool to check if the stock is just going down or up too fast, so we should also check it from time to time.

Cup and Handle I think is also solidly based on a psychology of investment crowds, so I always look for its emergence myself. Although in the end, all of these could be crapshoots/casino_bets only, especially if the PSEi and the overall market is really not in an uptrend (not confirmed up to this day).

So, in the words of the great Philosopher Inday Badiday... if youre still playing the PSE, still be "careful, careful. Kailangan parating maging careful."

Lookout Monday (Hope it's not a Panic Monday)

I make my stock pick on a Monday to get a feel first of the week's atmosphere, but this is not foolproof and only semi-rationale. Any news that comes out within the week can trounce any trend.

For tomorrow though, it's important to note that our index breached below several short-term moving averages. Another close-to-2% negative will make a Panic Monday. TA believers (Chartists) will unload big automatically.

We should hope that the big red candle last Friday was just temporary over-reaction over SM's private offering. It was not an opportune time to do top-up offering last week (SM should have waited when we're on a clear uptrend again), but we dont know when they need the money for upcoming projects, so we have to let that be.

MEG, MPI, SCC, FLI, MBT, TEL, and MER will be the stocks on the first page of my Watchlist, with the objective entirely just for range trading. The downtrend last week firmed-up my strategy not to hold issues for long, and not to aim for gains in double digits. Minders:

1) Hold 4 weeks tops.
2) +8% gain is heaven already, +5% realistic. Set sell price, immediately after buying.
3) Think of cutting losses at -8% as a general rule, but
4) but consider averaging down on
a) fundamentally very sound companies
b) leaders in their industry
c) <10 P/E price
d) high-dividend paying companies (consider the dividend yield as margin of safety)
(at least 3 of the four must be met before averaging down).

6) Still treat with suspicion companies that appear to breakout of resistance. Until the uptrend for the general market is very clear, it can go down -3% the following day.

This should be the guideposts until Moody's releases their report.

Other notes for the beginning of the week:

• TEL and ALPHA are involved in this important news. Tsupiteros will scramble over ALPHA, but remember that insiders are already positioned days ago. Dont aim for too high a profit if you decide to join in.
• Some index issues are due to announce earnings for first half this coming week. It can inject some energy to these individual issues and our market. Buy at least a day before if you believe that the income report will be staggering or very rosy.
• Foreign buying and selling are swinging daily. On some individual issues, foreign funds even appear fighting with each other fiercely. Better to stick to analysing the per-week values instead? 
• If a big negative at higher volume strikes us in the morning, consider cutting losses together with the Technical Analysis (TA) believers. 

Let's go!

Market Skim Through--August 02, low volume Thursday, watch out for bargains Friday

Volume was low yesterday. Market was able to inch-up a gain in ending, performance of index components are widely varied. There are big foreign sells in MEG and MPI, which I think are not warranted fundamentally. This could be a 'dump fake,' as I mentioned in a previous blogpost that if local funds follow, my own move would be to grab that bargain... in tranches. MPI, a solid conglomerate with a clear growth plan, should be among the stocks to spike-up when Moody's releases its upgrade. I should start to accumulate below 5.10, but I might buy some already at 5.23.

(MVP is still one of the better Chairman/CEO in the country)

I have also re-positioned in ALI and AC yesterday as part of the bet that 1) these two will be among the first to jump  after Moody's report and 2) their prices today are good.

SCC is also a good stock to reenter for me. The company's growth path is clear and it is one of the most resilient during the downturn. A price below 239 is a trigger for me to reenter.

So it is going to be a watch-out for bargains in the next few days. Buy in tranches (do not go all in) and use the guide posts of range trading. Rules also serve as protection if, indeed, Ghost Month is starting to eke in.

Good luck!

Well hello there index at 6800; nice to see you again!

Index jumped 0.9% to  6804. Breaching 6800 as a psychological resistance is significant, although chartists will be quick to retort that 6880 should be the resistance to break. Why?

Pardon, this is amateur charting...

1) if it's going to be a head and shoulder pattern, the resistance will be at  pink line, which is at 6880. A small correction should happen once index hits 6880.

2) if the index easily breaches 6880 in the next days, TA believers will pour in because it's probable that we'll go back to record high (or near it, or at least easily breach 7000 again) to complete a malformed inverted head and shoulders.

I will not vote between any of the two. And I will mention opinions about Technical Analysis in general as I attempt to do deeper blogposts in the future. At this time, suffice it to say that the market needs to be closely watched and that foreigners should come back, and that one should be updated with Bernanke all the time.

Also, keep cash positions. Dont go all-in. How much % cash is good? Depends on you and your amount of belief on your stock selection--or the company you are putting your money in.

Range-trading during a period of uncertainty

As Im writing this, PSE index is only 4 points away from 6800. Many 'investors' that were left holding the bag at above-7000, those shell-shocked by the sell-down of foreign funds last month, are starting to smile again. Im partially one of those investors. I chose not to cut loss, or I did not cut clean on most positions, and was only able to 'save' about 20% of my cash. That obviously was a bad move.

But I elected to pool a smaller fund, open another account in another online broker (to sort of start in a clean slate), still trade actively during the uncertainty, and focus on a few securities only, with two criteria: no bazurs (no BHI, no CAL, no TSI, however hyped they are in forums) and no lightly-traded security (no ANS, no SGI).

I profited a good +6.3% (of capital) taking advantage of predicted range trend in MBT, GLO, TEL, DNL, SCC, and VLL and partially (small one-time impacts) in ABS, BDO, ALI.  For example, I was able to go back and trade TEL four times, in the span of 4 weeks. I bought in tranches at 2830 and prices below and then immediately sold whatever I accumulated at 2930ish--no questions asked.

I would like to think that Im an expert with these moves that are suitable in an environment of volatility, but in truth, as most transactions in the stock market, these are all just bets. There were some rational bases, but luck (more like winds going in your favor) still is the bigger factor.

Nevertheless, if you ask for the bases and rules that I used, . Here they are:
1) took on faith that TEL and others are solid companies that is undeservedly cheap at their prices at that time, especially because there's the backdrop of an unusual, severe sell-off. For TEL, below 2830 was my set price. MBT and AEV at one time went below 10 P/E. And the circumstances (caused by merciless sell-off) were abnormal; these should not be their prices as normalcy returns.
2) forecasted that big bulls and bears are going to fight during that time of uncertainty, so small-time investors can benefit from their tussle.
3) when you observe even the daily trade, volatility was apparent. you can place a bid on the perceived lowest before price jumps again and then return to same number (some call these levels true 'strong' supports) in these daily trades and aim to exit in 3 days.
4) for GLO and TEL, I also relied on the fact that these are high-dividend paying securities, and that this fact would also be in the mind of players foreign or locals alike. Remember that if dividend yield of a stock is 4% of its price, you can be comfortable easily a loss < 4%. We know that GLO, TEL, SCC, Aboitiz stocks, MER, are generous in giving out dividends.
5) also held on to our recent gdp announcement --  +7.8%. You dont see that gdp number brandished every day at any part of the world!
6) also disciplined myself to be at least 30% on cash at any given trading day. At one point, after a previously-set sell points on two big positions were hit while I was on a beach, I was only 26.66% invested.
7) buy in tranches, ready to average down if needed. If your revolving capital is 1 M PhP, buy in amounts of 20 K - 30 K PhP. If 500 K PhP, buy in 10 K - 20 K PhP tranches. This is also optimum to avoid inefficient transaction fees.
8) lastly, again... no bazurs , no lightly-traded stocks.

So there, the reasons for my big gains in just 5 weeks.

But, as a caveat, there were downsides and mistakes:
> VLL, TEL, DNL, GLO, have now increased significantly since I last unloaded them, so there are still that couldve-been shouldve-been imperfect calls, bottomline. No remorse from my side, but trend traders would surely fault my method for not taking full advantage of the trend.
> I also made a mistake in buying and averaging-down on GMA7. The media stalwart aligns with #1 and #4 conditions,  but not #8, GMA7 is a non-bazur but it is very lightly traded nowadays. So this bad move was caused by not following set rules completely. Matigas lang talaga ang ulo (inborn stubborn).  
> MER was also a mistake, but it was caused by extraordinary circumstances prodded by SMC.
>> BUT Im still holding Kapuso and Liwanag. The loss in both after averaging down is not even 4% at present. So obviously, these are not staggeringly as bad a move in terms of impact.

Although, again, on hindsight, these are gambles. 'Expert' traders (like CANSLIM practitioners) will tell you never to come in when there is no clear market uptrend. However good the individual stock is, it will get pulled down by negative sentiment. If the volatility had a downward bias on medium term, if Bernanke firmed-up on his decision to ease QE by end of the year and did not become sheepish on his most recent testimony to the US Capitol, I could have been holding another portfolio set showing nothing but paper losses.

Good luck with your trades. The battle continues.

On averaging down (part 1) and San Miguel

Against the advise of many traders, I still practice cost averaging, partly because I find it as a way to minimize risks and be conservative on my bets. Chartists will be quick say that the method doesn't work and in fact risky, but I have good averaging up and/or down winning than losing moves. I'll write a few of my learnings on this method. Let's start with this first one...

AVERAGING DOWN LEARNING # 1

As in all securities that you should enter, one should cost-average down only if you believe in the company's fundamentals and management, not because one just believes in the method of averaging down. On a downtrend, averaging down can be purely catching falling knives.

And if the company is like San Miguel with brash Ramon Ang just diversifying like crazy and borrowing money and plowing along paying his managers high, while revenue and income are stagnant or decreasig, no method of cost-averaging can save the transaction.

This was my recent mistake.

San Miguel was among the last of the conglomerates to show strength, and among the cheapest (lowest in P/E), during PSEi's bull run from March to May, and I earned from its jump from ~113 to 123ish in near term, selling all shares before the downtrend to transfer funds to another one. I was aware of the huge debts this company has the inclination to rack up, so for sure SMC is not the company that should be for long term (it also doesn't pay much in dividends).

When the downtrend started, I cant believe a blue chip can go down 5% in one day without bouncing, more so in the backdrop of our scintillating gdp, so I reentered at point 1 below. Then the downtrend continued steeply, so i added in 2 at half the tranche of the first one . But then the downtrend continued steeply, so I added again in 3, a bit less than 2, hoping for a bounce to break even.

After a few days, traders are surprised to see that SMC is the lone conglomerate showing negative 30% year-to-date, amidst positive 30 % of its competitors! If this is not a slap in the face of SMC's board, I don't know what is. But RSA and Danding have nothing to say in their ASM, except something like "our fundamentals should speak for itself and help our shares up..." Goddamn, what are your 'good fundamentals,' SMC, compared to AEV, AC, et al? Decreasing income and increasing debts?

Damn these two cohorts:

By mid June, SMC is obviously weak and a clear laggard vis-a-vis its peers. There's no hope in gaining again in near term with SMC. Funds should have better use elsewhere.

As one last gasp, I observed that SMC's price seems to be bouncing in range, so I added a last position in # 4, which brought me to a final average price at 101, and then closely observed price behavior closely the following days and decided to sell at 92. With the gain in the bull of March - April, I still came out a loser by around 8 K with SMC. If i did not average down and stopped at 1, I would have lost only ~2.5 K.

This averaging down  was a mistake obviously 1) for fighting the clear downtrend (even falsely hoping for the short term bounce), and 2) betting on SMC.

# 2 is obviously the bigger mistake. I'll write more on SMC later.

But there's a coda to this story... In a few days after I sold it, SMC tumbled down further and harder on the rumor of a default, spread by IMF no less and Tiglao (ex press secretary which must be hunted now by Danding).
I was still thankful bottomline. And I do not intend to come back to this supposed Philippine institution unless there's management change or a staggering positive milestone like the promised turnaround of PAL materializes, or the bragged new airport really happens.