NUSInvest Workshop Series Session One Introduction to FA/TA

1. NUSInvest Workshop Series Session One Introduction to FA/TA

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3. FA vs TA

4. FUNDAMENTAL ANALYSIS Fundamental analysis of a business involves analyzing its financial statements and health, its management and competitive advantages, and its competitors and markets. Economic Analysis Industry Analysis CompanyAnalysis

5. TECHNICAL ANALYSIS The study of market action, primarily through the use of charts, for the purpose of forecasting future price trends. • All information is reflected in price (responses & sentiments) • History repeats itself • Technical Analysis can be applied to different trading mediums/markets/assets

6. FA vs TA TECHNICAL ANALYSIS FUNDAMENTAL ANALYSIS • Focuses on the economic forces of Demand & Supply that causes prices to move • Finding the intrinsic value of the market/asset • Characteristics of a company is employed in the analysis • Effects of economic factors on a stock such as earning reports, cash flow, etc are concerned • Analysis using past data of Demand & Supply • Study of historical graphs is stressed • Identify a trend at a relatively early stage & ride on that trend until the weight of the evidence shows or proves that the trend has reversed • Deals in probabilities, never certainties

7. Efficient Market Hypothesis • Criticisms of FA and TA • 3 Versions: Weak / Semi-strong / Strong • Impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information • EMH: stocks always trade at their fair value (impossible to purchase undervalued stocks or sell at inflated prices)

8. Intro to TA

9. Charts • Candlesticks stresses relationship between open and close prices

10. Candle Anatomy • Body: Distance between open and closing • Tip of upper wick/shadow: Highest price of that period • Bottom of lower wick/shadow/hair: Lowest price of that period • Range (length) of candle stick indicates volatility • Upward candlestick usually white or green orblue • Downward candlestick usually black or red BearishCandle BullishCandle

11. Gaps • Gap: Current open is not the same as prior closing price • No price and no volume transacted hands between the gap (area on price chart where there is no trades) • Effect of news after stock market closed for the day (e.g. earnings report) • Psychology: Can act as resistance/ support (news that sparked the gap is still in play)

12. Daily Chart – Wal-Mart (WMT)

13. 1 Price-Bar Pattern

14. Hammer • Found in downtrend • Short body at the top of price range • Little to no upper shadow • Lower shadow must be at least twice the length of real-body • Signals: Reversal pattern when found in a downtrend • Short-term outlook indication • Real body can be black or white(white: stronger signal)

15. Hammer • Low reliability, requires confirmation • Bullish gap for next session • Subsequent session shows white real body above that of the hammer’s real body • Significance/ Strength: • Length of Lower Shadow • Colour Buyers drive prices back upto close near the highs Long lower wick indicates initial selling prices PRICE TRADING STRATEGIES 2-BARS PATTERN 1-BAR PATTERN 3-BARS PATTERN BACKGROUND

16. Hanging Man • Found in uptrend • Short body at the top of price range • Little to no upper shadow • Lower shadow must be at least twice the length of real-body • Warning of a potential downward • Short-term outlook indication • Also requires confirmation

17. Hanging Man 1. Uptrend2. Gap Up3. Lower Shadow at least twice as big as Real Body4. Real Body Bullish or Bearish; better if Bearish5. Confirmation Candle Greater gap: Higher likelihood of reversal

18. Shooting Star • Found in uptrend • Short body at the bottom of price range • Little to no lower shadow • Upper shadow must be at least twice the length of real-body • Signals: Reversal pattern • Short-term outlook indication • Real body can be black or white(black: stronger signal)

19. Shooting Star • Low reliability, requires confirmation • Bearish gap for next session • Subsequent session shows black real body below that of the shooting star’s real body • Significance/ Strength: • Length of Upper Shadow • Colour Bears were able to rejectbulls completely (or push prices evenlower by closing below open) Long upper wick indicatesinitial buying prices Open

20. Shooting Star 1. Uptrend2. Upper shadow at least twice as big as real body 3. Real body bullish or bearish (bearish: stronger indication)

21. Inverted Hammer • Found in downtrend • Short body at the bottom of price range • Little to no lower shadow • Upper shadow must be at least twice the length of real-body • Signals: Reversal pattern • Short-term outlook indication • Real body can be black or white(white: stronger signal)

22. Inverted Hammer

23. Spinning Top & Doji • Short body in the middle of two long wicks • Market closed relatively unchanged • Indicates indecision (‘standoff’ after significant price movement) • Trend losing momentum; possible turning point • Doji/ Long-legged Doji: stronger signal • Open and close are the same • Insignificant in sideway markets Buyers in control Sellers in control

24. More Doji Patterns

26. 2 Price-Bars Pattern

27. Bullish Engulfing Candle • When found in a downtrend: • Bullish candle opens lower than previous candle’s close, closes higher than previous candle’s open • Potential sign that trend is reversing • Indicates control has shifted from sellers to buyers Gap down

28. Bearish Engulfing Candle • When found in a uptrend: • Gap up: Bullish sign • But: Bulls only push prices up slightly before bears take over and push prices much lower • Potential sign that trend is reversing • Indicates control has shifted from buyers to sellers Gap Up

29. Bullish Engulfing 1. Downtrend2. Bearish Candle3. Gap Down4. Bullish Candle5. Close above previous Bearish Candle

30. 3 Price-Bars Pattern

31. Morning Star • Consists of 3 candlesticks • Bearish Gap: Bears are in control during opening • Day 2: Prices are not pushed much lower (small / neutral candlestick) • Bullish: stronger sign • Day 3: Bullish gap up • Prices pushed further upward, sometimes eliminating all Day 1 losses

32. Evening Star • Consists of 3 candlesticks:- Bullish, Small/ Neutral, Bearish • Presence of bullish gap, bearish gap • Day 2: Prices are not pushed much higher • Bearish: stronger sign • Day 3: Large bearish candlestick • Prices pushed further downward, sometimes eliminating all of Day 1’s gains

33. Evening Star 1. Uptrend2. Bullish Candle3. Gap Up 4. Small Bullish/ Bearish Candle 5. Gap Down 6. Bullish Candle Morning Star Pattern

34. Many other chart and price patterns, indicators, theories… CHART CONSTRUCTION SUPPORT & RESISTANCE

35. Reversal Patterns CHART CONSTRUCTION SUPPORT & RESISTANCE

36. Others • Fibonacci • Continuation Patterns • Moving averages • Oscillators and momentum indicators • Pivot Points • Trading Divergences • Elliott Wave Theory • …

37. Resources • Babypips.com • Forexfactory.com

38. Intro to FA

39. Basics of FA • Buy and Hold • Latch onto a good business and allow investor’s assets to grow with the business • Value Investing • Seek under-valued companies • Dividend Investing • Seek blue chip stocks that generate dividends consistently

40. Basics of FA • Top-Down Approach • Starts with analysis of global economics • E.g. GDP, Interest Rates • Narrows down to regional/industry analysis • Total sales, trends, Growing/Sunset

41. Basics of FA • Bottom-Up Approach • Starts with specific businesses, regardless of industry/region

42. Basics of FA • Qualitative & Quantitative • Intrinsic Value (true value, not necessarily market price) • Find opportunities to buy at a discount • Wait for investment to pay off when market catches up

43. Industry Factors • Industry life cycle • Emerging, Growth, Maturity, Decline • Key Trends • E.g. Airlines: Fuel Cost; Jewellery: Gold Price; REITs: Interest rates

44. Company Factors • Business Model • Competitive Advantage • Management (ownership - founder? Insider shareholdings?) • Market Share • Competitors’ Performance

45. Financial Ratios • 5 types of financial ratios

46. Price Earning Ratio (P/E) • Price of Share divided by Earnings per share (EPS) • Values the share based on earnings • The lower the PE compared to similar companies the better the value • However, more research the reason behind low valuations

47. EBIT • Earnings Before Interest and Taxes • Adds Interest and Tax Expense to NI • Gives a clearer picture of company’s ability to generate profits • By taking away distortions from financing cost and tax structure

48. EBITDA • Earnings Before Interest Tax Depreciation Amortization • A PROXY of Operating cash Flow • Important in determining firm’s ability to generate cash

49. Price to Book Ratio (P/B) • Compares stock’s market value to its book value • A low P/B ratio could mean that the stock is undervalued • Also gives some idea of whether you’re paying too much for what would be left if the company goes bankrupt

50. Earnings per Share (EPS) • The only financial indicator companies are mandated to provide in their annual report • One of the most important indicators of profitability • Shows the ability of each share in generating accounting profits • Trend is important in analyzing EPS