maybank ib - market | bursa malaysia · pdf fileslide 2 of 40 © 2011 maybank-ib why...

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© 2011 Maybank-IB

Maybank IB

Understanding technical analysis

24 September 2011

by Lee Cheng Hooi

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Why technical analysis?

1) Market action discounts everything

2) Prices move in trends

3) History repeats itself

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Talk contents

1) My introduction & story of TA

2) Tools of the “TA trade” (MBB Platform)

3) Examples of chart success

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Talk contents


2) Tools of the “TA trade”


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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.

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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.

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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

SMA is called a “Dead Cross”. A great trend following tool.

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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.

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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.

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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 toexpect 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 non-

trending markets.

•Trend-following indicator.

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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.

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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.

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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.

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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.

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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.

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Lee Cheng HooiVP & Head of Retail Research

Tel: 03-2297 8694 DL

BB: 012-271 8729

Email: [email protected]

My contact details

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DisclaimerThis 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

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(Formerly known as Aseambankers Malaysia Berhad)

(A Participating Organisation of Bursa Malaysia Securities Berhad)

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