Weekend Report-Nov 27th 2010- Market Technical Analysis

Traders,
Even though market technicals have been weak, I really expected much waited budget proposal would lift the market or at least it would create a short term momentum. But it did not happen. This was an honest surprise to me.
Most of you may wonder why the market is behaving like this?
Lets see some possible reasons;
1.Some institutions and some big investors continue unload their stake slowly but steadily on the market
2.There are no significant new traders/investors coming into the market
3.Significant amount of retail investors and traders unwillingly cash their stakes for liquidity reasons

All these or combinations of these are creating more supply than the stock demanded by institutes, investors and traders.
Now, lets look at our favorite weekly ASI graphs;

We have been watching the 6500 support line for sometime now and market clearly broke it creating another leg down. How low will it go? I do not know. But I would definitely wait till the market confirms a 'change of direction'. Market has to show at least 200+ point recovery with decent volumes in order for me to test the water.

When stocks look cheap compared to previous high, people buy them guessing market has reach the bottom. Guessing the bottom is an expensive game. One alternative approach that I have been writing about is "scale up strategy".  This is an intelligent way to keep your losses very low. I learnt this approach from Jesse Livermore. More I trade more I understand the value of this simple but powerful strategy. (read my previous articles on Livermore for his key trading rules)

Lets briefly look at foreign buy and sell. I am taking this graph from JBS securities site;

Take a few minutes to understand this informative graph. There is lots of not so good trends here. But one positive indication you may notice is last three days net foreign buys, specially the last bar of the graph.

Lets look at  Financial sector for a moment. Is it holding its place or giving up the gains? Let's see;

Financial sector has relatively been holding to most of its gains but it also broke the support line with heavy volumes.
With all things considered, market is under Red light. We got to be patient here till  we see a silverline.

To your success,
Manoj Balasooriya

Weekend Report-Nov 20th 2010- Market Technical Analysis

Traders,
Though last week was a short trading week, it brought both frustration and hope. At one point, ASI dropped to 6451.55 which was below the support line we were watching. But very next day it climbed 93 points to 6565 giving some relief to the traders.
If you look at the last two trading days on the ASI daily graph, you will notice that it was under clear accumulation. There was heavy selling on Wed, but prices held on tight. And on Thu some traders/institutes clearly bought stocks on the bet that budget will uplift the market.
Let's look at three market graphs.
If you been following this blog, you should now be familiar with reading it.Market is back in the safety zone and reasonably good volume supported the uplift.
Thursdays market action is counted the first day of accumulation (after failing one such attempt in 3 weeks ago).If ASI can confirm can the positive trend at least two more days without heavy selling off days, one can buy shares on "Scale Up" basis.

Lets dig a little bit further;

Notice the Stochastic oscillator above trying to go up from the oversold territory. Also Money Flow Index (MFI) hit a substantial lower point on Wed and now trying to head up.

Finally, let see how stock accumulation happened on Thursday; Traders bet on budget!

 
This brings us a good point. Should you buy stocks on speculative news? Most of the traders do not have capacity to influence the market, specially the market leading stocks. But there are traders and institutes who can make the price if they wish to, because of their enormous trading capacity. This is common to any stock market. In a scenario like this, our best bet is to monitor the market and follow the line of least resistance, meaning if the market is clearly heading up Buy and if market shows weakness Sell. In other words, market should confirm the trend for us to get in.
That does not mean you can make money by betting on news. You can. But is it a good enough reason to bet your capital?. I don't think. Preserving your capital is the key to stay in the market. And losing a few points in waiting and evaluating market is a good insurance premium. It puts you in a better position and make you a prudent trader.
With this technical insight in mind, watch the market on coming days, and getting in on Scale up basis if everything is in your favor. If market shows sideways again, You know what to do...

To your success,
Manoj Balasooriya

Note: Please forward this article to your friends and trading buddies. And take a minute to leave your comments. They inspire me to take the time to continue writing. Thank you.

Weekend Report-Nov 14th 2010- Market Technical Analysis and 10 Priceless Trading Rules from a legendary Trader

Traders,
After a week of trading, its a good time look back and see how the market behaved and see what we can anticipate in the coming week.We'll start with the latest ASI screenshot;

Those who think technical analysis does not work, just need to look at the above graph. I have not come across a so clear support line than above in recent history. During last 45 days, ASI touched support line three times and was able to bounce back without breaking it.
Volume shrank to a very low amount. If you look at the last volume bar, you'll notice that its the lowest in the recent past.
Funds stuck in two IPOs, government annual budget, and heavy disturbing weather are three key things that affected the market.
Based on above the ASI behaviour, there are two scenarios that can happen in the next week;
1. Market will bounce further above the 6500 level. If this happens, its worth paying attention to leading stocks that are showing upward momentum. Reason is, budget is one week away and market can indicate some clues of what you can expect.
Financial sector is an obvious benefiter, because its where Sri Lanka's key advantage lies. Government has already indicated that its planning to reduce certain tax relating to banking profits. Also if you look at BFI index (Banking, financial & Insurance), you can notice that, it has been resilient to the recent market correction.

2.Market will break the support line. If this happens, I could say that it should be temporarily. Sometimes, a sudden breakdown and immediate bounce back could further shake away weak traders out of the market. And after, subsequent recovery could be stronger as a result.

My recommended strategy is to scale up on an uptrending market. But market has not shown clearly that its uptrending yet.
Observing the market till right time comes is also a strategy. Its natural to feel that you should trade everyday and thats a recipe for disaster. My favorite all time trader hero is Jesse Livermore. I could survive some bad times because of the wisdom that he passed on to others.

For your Trading Wisdom 
Once he said "There are times when money can be made investing and speculating in stocks, but money cannot consistently be made trading every day or every week during the year. Only the foolhardy will try it. It just is not in the cards and cannot be done." http://www.jesse-livermore.com/

His Trading Rules...

• Buy rising stocks and sell falling stocks.
• Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.
• Co-ordinate your trading activity with pivot points.
• Only enter a trade after the action of the market confirms your opinion and then enter promptly.
• Continue with trades that show you a profit, end trades that show a loss.
• End trades when it is clear that the trend you are profiting from is over.
• In any sector, trade the leading stock - the one showing the strongest trend.
• Never average losses by, for example, buying more of a stock that has fallen.
• Never meet a margin call - get out of the trade.
• Go long when stocks reach a new high. 

You can read the full article at http://www.jesse-livermore.com/trading-rules.html

Read these rules over and over and over... you will benefit from them years to come.

To your success
Manoj Balasooriya

Tell me how you think about the blog and the articles and share your thoughts ideas. As always I really apprecite your comments.
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Eight steps for success; Eight goals for every trader.

Traders,

I found below article in http://blog.traderslibrary.com. Even though blog focuses on US market, there is plenty of good articles there.

As I mentioned in my blogs, be a student of the market;make reading a priority 

Manoj

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WARRIOR TRADING WITH CLIFFORD BENNETT

Clifford Bennett has written an excellent book on conditioning the mind for successful trading.  Bennett, a currency trader, outlines the stock trader's "eights steps of battle" in his book Warrior Trading: Inside the Mind of an Elite Currency Trader.   These eight steps are intended as a guide to the new trader and a reminder to the experienced.

1. Find Your Strength.  It is important that the trader determine what type of market, trending or consolidating, best suits their own personality and strength.  The best traders stay focused on one or the other and master it.

2. Know Your Market.  You should know your market when trading.  In other words, know the levels of support/resistance;  know how the instrument you trade moves with the general market; know who is likely to be on the other side and what they are thinking; and "the terrain of any market includes the "long-term charts" (140).

3.  Prepare Your Order.  Know when to get into a trade and why and know when to get out of a trade and why.  Just like a secret agent who will "never enter a room without knowing how to get out of it in a hurry" (142).

4.  Placing Your Order.  Once you have adequately prepared for a trade, it is then necessary to be ready to place the trade when the time is right.  Here "patience is the key...you must be able to wait for the market to tell you when the moment is right.  Wait for the market to generate the action; don't force it" (143).

5.  Sticking With Your Plan.  This is probably the hardest part about trading.  Once you enter the battlefield (enter a trade), the emotions of fear, ecstasy, greed, and sheer excitement can then take over and cause you to forget your well prepared plans for entry and exit.  You must enter a "Zen-like mental state" where you remain in control of your emotions.  Not doing so could spell disaster.

6. Identify When You Are Wrong.  "It is crucial to your survival to identify in advance whether your view might be wrong and to determine what price level, when broken, would be in support of the consensus view; therefore, you are building up your ability to defend the occasional probes against you" (145).

7.  Holding On To Your Winning Positions.  Set a trailing stop when your trade is moving in your direction thereby locking in profits while allowing the trade to work toward its maximum potential.  "A trailing stop loss keeps you in the war, keeps you in tune with the war, and, most important, leaves you in full readiness to instantly strike again" (152).

8.  Focus On Your Next Trade.  This is the most important step and is saved for last.  This step simply says to start anew with each new trade.  No matter if you won, lost, or broke even on the last trade, the next trade is a new one.  "You do indeed need to be starting every single trade fresh and alert without any baggage from the previous encounter" (153).

Eight steps for success; eight goals for every trader.

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Weekend Report-Nov 06th 2010- Market Technical Analysis & a Strategy

Last week has been a news full of week. As traders if you  had followed some of the news, you could see the positive expectations lots of companies and fund managers have towards 2011 specially in the finance sector. Since Sri Lanka finance sector has been resilient to many economic challenges, its expected to outgrow ASI return during the economic boom. So its well worth to allocate significant part of your portfolio to this sector. More on this later.. Lets now focus on the technical side of the market.

Market lost three days out of four it was open. Wed market action really caught my eyes. Trading volume was very high compared with recent 2-3 weeks but price did not drop significantly. This tells us that market is absorbing the selling pressure. Even though the volume was low rest of the week, market was able to put the break on downside.

Key points
1. Market is still above the support line (158 points above)
2. Price declining is gradually slowing down
3. Based on the trendline (thin blue line) its possible that market may hold on above the trendline next week.

Now, lets look at Yahoo graph week ending Nov 5th.

If you look at the 20 day 50 day MA (moving average), market has not significantly violated the MAs. So the reaction started in Oct still come under a 'short term'correction. Stoch (which shows over-bought or over-sold condition) and MFI (money flow index) is a bit disappointing, but still above the last week of Oct lows.

WHAT TO LOOK FOR WHEN A MARKET IS IN A TRADING RANGE LIKE THIS
When a market is trading in a range like this, it gives us the chance to evaluate which stocks/ industries are stronger than the market. And when price starts o climb up, stocks that held their prices tight will go up much higher than the market.
For example, let's look at recent HNB stock graph;

(Bloomberg.com)

When the overall market is trading in a range (and unable to break the upward movement), HNB is refusing to be in the group and showing a upward momentum. There are many stocks like that. So rather than waiting till prices to start going up, research these type of stocks and add to your potential list (watch list).

You may have noticed that I always mention the data source where I get this data from. This is to enable you to go to the same source and start your research work.

Get informed and get smart!, Have a great Trading week.
To your success,
Manoj Balasooriya

Note: Thank you for visiting the site and joining me here. Appreciate if you can take a minute and share your comments and thoughts;
Thank you.

Await for ...Weekend Report-Nov 6th 2010- Market Technical Analysis..............

Member,
Await for ...Detailed weekend Report-Nov 6th 2010- Market Technical Analysis.......soon to be posted.

Manoj

Nov 4th 2010 - Member Questions & Answers

shehan wickramarachchi 

Hello Manoj,

"Central Bank of Sri Lanka (CBSL) is in a policy decision to allow Sri Lankans to open bank accounts abroad and buy shares and debt of foreign companies as part of a loosening of foreign exchange controls, Central Bank Governor Ajith Nivard Cabraal revealed."

with this move taken by CBSL will there be an opportunity for retail investors to enter foreign stock markets?
Can you explain how a local can trade in a foreign stock market?(brokers,currency conversion,taxes etc)

btw your blog is so informative.keep up the good work.
thank you

Answer

Hi Shehan

If Sri Lankans are allowed to open currency accounts, yes definitely you can buy & sell shares. I do not know the system government is going to use to monitor the account activities. 

Setting up your account would be the easy part, but understanding foreign markets and foreign companies is going to take some time.

Go to www.wsj.com and www.stockcharts.com regularly and be familiar with markets/stocks. You can register free with them and you can also create a watch list.

Most brokers here are 100% internet based. www.scottrade.com www.etrade.com are quite popular.

Currency conversation is based on daily buying & selling rates. Daily papers publish rates every day.

Basic remains the same. So trade Sri Lanka stocks first and as a diversification you can invest some of it in overseas.

Dr. V. W. Jagath Vasanthathilaka

Dear Manoj

You have made a good analysis of market trends. Why do you think that CSE is slow to recover? Is it due to continuous process of debt collection by the broker firms?  We thought this process is over. How can we create positive attitudes towards investment at the CSE? Currently I am in USA; however I am a Sri Lankan resident. How can we minimize the dissemination of negative attitudes towards CSE?  Positive financial reports and excellent cooperate earnings should drive the market. How can we make the CSE an attractive place for investment? I think you are doing a great service by encouraging investors.

Thanking you

Answer

Hi Dr Vasanthathilaka

Thank you for your kind words. There can be lots of reasons why market is acting slowly, but if you look at an yearly chart of  the market (ASI)  you will see Aug to Oct -2010 market went up drastically. After CSE got anxious about it, they curtailed trading capacity of traders. That initiated the reaction. During a normal reaction, a market goes down up to about 5%. But so far Sri Lanka market has gone down about 9%-10%. So its going to take some extra time to get to new high.

Also, government made some recent announcements saying it was going to change tax structure, relax foreign currency restrictions, introduce new business proposal to attract foreign investments. I think these have led to some waiting games. As soon as budget proposals are revealed, stock market should react to the new business conditions.

Good earning reports do not necessarily lead to upside market behavior. Sometimes, experienced traders & investors use good news to sell their big positions. That’s why its important to evaluate the technical side of the market.

I believe Sri Lanka market is a better place invest. If you look at the broad business conditions like employment levels, interest rates, inflation rates, they all show improved levels.

stardust

Manoj, I'm happy to see a blog on technicals its always an advantage to see which way the market is heading. Have been intrested for years in charts.
I have a question though, how are you able to call this a bull market, and what qualifies as bull market? Personaly would have called this unsettled, or volitile at present, moving sideways even, but not bull, just wanted to know if I'm missing something, or are you calling this a bull run within a time frame?
Best always with good intentions

Answer

Hi,

There are different criteria one can use to identify market conditions. One arbitrary rule is, if a market goes down more than 20%, its said to be in a bear market condition.

Other criteria is “economic cycle”. Country’s economy goes through different stages of growth levels.  Basically from a boom to recession. When a country goes through a recession, one can see all the so called negative news; job losses, shrinking aggregate demand for products & services, decrease level of credit facilities etc. Obviously we don’t see that in Sri Lanka. On the contrary, economy is in a steady growth phase.

Its very important to understand the different market reaction levels. What we witness now is a short term market reaction. One can use moving averages to get an idea about this. Yahoo graph is an excellent source. Try 20 day or 50 day MA (moving averages). It has not been seriously violated. To see long term changes, use 150 day 200 day MA.

Because of these facts, I call Sri Lanka market is in a bull market condition.   

ASI graph with 20, 50, & 200 day moving averages

I have received lots of questions. I’ll try my best to find time to answer them soon.

See you again

Manoj Balasooiya

Tue, Nov 02nd 2010 - Market Technical Analysis

Yesterday market behavior was not a good sign. It shows there are sellers waiting to get out when prices recover at certain previous highs. When a market is in a recovery process, signs like that indicate buyers hesitancy to bid higher and also lack of buying enthusiasm. Yesterday sellers dominated the market.

                                                          (yesterday ASI intra-day graph)

Also longer a market stays around support areas, it loses its strength. ASI is about 200 points above the major support line.If it can hold on to this safety area, it would show market ability to absorb sellers pressure.
Watch first 1-2 hours of trading, and it will set the tone for rest of the day.Trade with very caution.

To your success
Manoj Balasooriya

Mon, Nov 01st 2010 - Market Technical Analysis

Mondays are usually not a very upbeat day for the market. Despite that it was the first day of the month and pricewise market did a fairly good job. Three things that  were not-so-good were;
1. Volume was very low (So today's action is not counted as a key accumulation day)
2. Most of the market leaders did not perform very well
3. Milanka index showed a downward trend (Monday intra-day chart)

Good news is, market crawled UP for the  fourth (4) continuous day. And companies continue report good earnings;
Below graph shows, everything above in nut-shell.

As I mentioned in my weekend report, patience is key. Use Scale up strategy. This will keep your losses to a minimum in case if prices reverse.(Cut your losses quick and let your profit run)

Q&A
One of the readers had a good question. This trader had bought a very cheap financial stock with loaned money and price kept on going down. You can imagine how he feels. I sent him a personal email but I am sure most of you have experienced something close to that.
I want you all to burn this point to your brain. "Leave cheap stock alone". As a rule I do not buy anything below Rs.10.00 (I violated this rule only once and made a loss on that trade too). Even in the US market, I did not buy anything below $10.00.
Some company stocks are cheap because company is cheap. Its not like you are going to a mall and see something at a bargain price. We tend to think, if something is cheap its less risky. But when it comes to stocks, its quite the opposite. Cheap stocks are risky.
For example, say you bought PCH for 9.50. If it goes down by 0.75, you lose 8% of your capital. Some might say 'how about it goes up?' Well, it may go up BUT POSSIBILITY of happening that is low compared with fairly high price stocks.
Instead, say you bought SAMP at 280 and price went down by Rs.4.00. How much you lost ? only 1.4% .
Point is,its less risky and high rewarding to buy high price leading stocks, than beaten down bargain stocks.

To your success
Manoj