Investment Thinking using Technical Analysis

1. Investment Thinking usingTechnical Analysis Team Learning using Mali’s Example posted on 15th Dec. 2003

2. Introduction First of all, thanks to Mali’s sharing on “Potential Investment Areas”, an email she shared with us while talking to her friend. I wish to use the example given and the underlying thinking of Mali to further reinforce our learning on the discipline of Technical Analysis, based on the little we learn so far, S&R, Trends. I illustrated earlier how market news e.g. “Rail Project Delay Dampens Market” does not help investor much. At the same time, there are always many other and different views expressed by different parties or experts, or there are certain views we hold dearly ourselves, say we are accountants, hence we tend to look at fundamentals, or we are economists, prefer to take the economic factors in our investment consideration, some like to take political consideration! It is not so much whether such views are correct or wrong, but how do we make full use of Technical Analysis to make sense of such information, theories, or view-points.

3. Key Questions • For that, our key questions or FOCUS should be : • We are small investors, having say, saving or spare money of RM 20,000, or 200,000 or RM 2 million, how, what and WHEN to invest such money to get good return of say, 20%, or 40%, 80%, or even 200%? • How can TA tools as a set of discipline help to objectively filter the many different, or conflicting or confusing signals, or opinions or theories so that we can be pretty sure we get the good return with well strategized risk/reward consideration? • With the above as our focus, we will go through Mali’s reasoning so that we develop the skills and discipline next time when we are faced with different views and know how best to make use of our TA knowledge.

4. Review our thought pattern “Bank Rakyat dividends of nett 10.8%, low risk” Here the assumptions a) after one year, b) “guarantee” Questions you need to ask : “Do you want higher return? 20%, 60% even more etc.? If you worry about risk, then it is a matter of knowledge and skills, that is why you are in this TA tuition class. It is not risky for Azaha to sail round the world solo, because he has the knowledge and skills on sailing.

5. On Schlumberger Ltd stocks "stock mahal laa... based on fundamentals P/E ratio 38.9 times, EPS - $4.01, Pretax margins -16.6%, Return on capital employed = - 33.18% (making losses laaa..), etc' We will study the above logic carefully from TA perspectives ... As Mali's observation, "Despite all these, its share price has gone up about 35% since March." That is the market sendiment, or investors psychology (remember the psychology of Support and Resistance article), they do not care much about fundamentals. If we can catch such human emotional behaivor from the graph and TA, and that gives us an opportunity to get 50-70% return (much better that dividend of 10.8% Bank Rakyat, would you not go for it? That is the beauty and power of TA.

6. Hence as TA investors, our frame or mind should work in the following manner. - We will not talk about the stock is too expensive or too cheap, but we look at the graph and ask, what are the TA signal that say that there is potential for the stock to move higher from current price, what rate of return, what risks? (Here we are assuming you have been keeping close watch of the company, knows it core-business, having some confidence that it should not collapse or bankrupt too easily etc.) So, we look at the graph of “Schlumberger Ltd ..”.

7. If you consider today US 51 is expensive, the market sentiment had pushed the price to almost US 90 twice!. Our TA focus is : From the trend and patterns of today 51, what are the R&S? (you may like to do this as exercise using the graph). How to calculate the next possible price projection in the next few months? (next two lessons will answer that question.) What do you observe about the volume pattern?

8. “We see short term recovery in the US stock markets until early-mid 2004, coz Bush junior wants to win the election.” This viewpoint is similar to our earlier market talk about election before Mahatir stepped down. Our key question should be “Based on current trend and pattern, what time frame projection can we calculate to guide us in the possible price changing pattern?” For that, our next two lessons will answer that question. If the calculation also coincides with the view of mid 2004 election of US, then take that as reinforced signal. If not, as TA discipline, stick to the TA theory!

9. "The longer the boom (US = 20 years since 1980s), the longer the bust to clear the excesses (see Japan economy). ..... So I forecast the value of the Dow Jones Industrial Average to fall by 50% ..." We already observe the market goes up and down, like sun rises and sun sets, behavior of nature, and behavior of human psychology. As TA investor our key question is - Timing! Timing! Timing. When is it? Before it falls, is there room for me to make some more money from the crazy market sentiment? when it falls, I could also make money using option trading. We have to fall back to TA to guide us on that key question. "So I suggest for you to go OUT of US stocks (e.g. Schlumberger). " Study the graph again and apply the TA! .

10. I really hope the rest of the class readily express your views and opinions like Mali. Then I can apply learning intervention from TA perspectives (as that is your investment in paying me the tuition fee). Beside acting as your teacher and coach, I am also a serious investor, with aim for very high rate of return of investment using TA. Once you master the skills of TA, and when I advise the TIMING to invest, (as I will invest with my every cent!) you will also have the confidence and conviction to do so. More importantly you have full control of your own money and investment Let us make big money together using TA discipline. Happy TA learning. Andrew, your investment coach.