Technical Picture Remains Bearish

The technical picture continues to be bearish across the board, despite the mid-week surge in stocks, with all of the key trend indicators still pointing lower. 

The S&P 500, the Nasdaq, and the Dow are still all well below their declining 50-day averages, and the benchmarks are also all below their 200-day moving averages. 

Small-caps finally showed relative strength during the crazy short-covering rally, but despite its positive week, the Russell 2000 closed below both its short-and long-term moving averages on Friday. 

The Volatility Index (VIX) only finished slightly lower despite the double-digit gains of the major indices, and the fear gauge closed the week above the still extremely high 65 level, due to the economic uncertainty.

Market internals improved substantially thanks to the broad rally, but even though a V-shaped recovery is not impossible, the current positive divergences have to be taken with a grain of salt in light of the extreme market conditions. 

The Advance/Decline line bounced back sharply this week, as advancing issues outnumbered decliners by a 15-to-1 ratio on the NYSE, and by a 14-to-1 ratio on the Nasdaq. 

The average number of new 52-week highs was close zero on both exchanges, edging lower to 1 on the NYSE and 3 on the Nasdaq. 

The number of new lows collapsed in the meantime, falling to 130 on the NYSE and 125 on the Nasdaq. 

The percentage of stocks above the 200-day moving average increased somewhat thanks to the strong rally, but the measure remains near its multi-year low, finishing the week at 9%.

https://www.valuewalk.com/2020/03/fed-unlimited-qe-program/

How to be successful in using technical analysis

To be successful, the technical approach involves taking a  position contrary to the expectation of the crowd.

This requires the patience, objectivity and discipline to acquire a financial asset at a time of depression and gloom, and liquidate it in an environment of euphoria and excessive optimism.

The level of pessimism or optimism will depend on the turning point.

Short-term peaks and trough are associated with more moderate extremes in sentiment than long-term ones.

Knowing the technical characteristics to be expected at all of these market turning points, particularly the major ones, allow you to assess them objectively.





Technical analysis in Practice

In practice, it is impossible to buy and sell consistently at exactly the turning points, but the enormous potential of this approach still leaves plenty of room for error, even when commission costs and taxes are included in the calculation. 

The rewards for identifying major market junctures and taking the appropriate action can be substantial.

In the days of the old market, participants had a fairly long time horizon, stretching over months or years.  There have always been short-term traders and scalpers, but the technological revolution in communications has shortened the time horizon of just about everyone involved in markets.

When holding periods are lengthy, it is possible to indulge in the luxury of fundamental analysis, but when time is short, timing is everything.  In such an environment, technical analysis really comes into its own.

Originally, technical analysis was applied principally in the equity market, but its popularity has gradually expanded to embrace commodities, debt instruments, currencies, and other international markets.

Technical Analysis Defined

The technical approach to investment is essentially a reflection of the idea that prices move in trends that are determined by the changing attitudes of investors toward a variety of economic, monetary, political and psychological forces.

The art of technical analysis, for it is an art, is to identify a trend reversal at a relatively early stage and ride on that trend until the weight of the evidence shows or proves that the trend has reversed.  The evidence in this case is represented by the numerous scientifically derived indicators.

Human nature remains more of less constant and tends to react to similar situations in consistent ways.  By studying the nature of previous market turning pints, it is possible to develop some characteristics that can help to identify market tops and bottoms.  

Therefore, technical analysis is based on the assumption that people will continue to make the same mistakes they have made in the past.  

Human relationships are extremely complex and never repeat in identical combinations.  The market,s which are a reflection of people in action, never duplicate their performance exactly, but the recurrence of similar characteristics is sufficient to enable technicians to identify juncture points.  

Since no single indicator has signaled, or indeed could signal, every top or bottom, technical analysis have developed an arsenal of tools to help isolate these points.

A study of the market can also reveal much about human nature, both from observing other people in action and from the aspect of self-development.

There is no reason why anyone cannot make a substantial amount of money in the financial markets, but there are many reasons why many people will not.

The key to success is knowledge and action.  

• Knowledge of the internal working of the markets and of investing is important.  
• Action is dependent on the patience, discipline and objectivity of the individual investor. 

Today, numerous charting sites have sprung up on the Internet, so virtually anyone now has the ability to practice technical analysis.  As a consequence of the technological revolution, time horizons have been greatly shortened.

• This may not be a good thing because short-term trends experience more random noise than longer-term ones.  
• This means that the technical indicators are not as effective.

Nothing has really changed in the last 100 years.  The same true and tried principles in technical analysis are as relevant today as they always were.  There is no doubt whatsoever that this will continue to be so in the future.

• Thus, technical analysis could be applied in New York in 1850, in Tokyo in 1950 and in Moscow in 2150.  
• This is true because price action in financial markets is a reflection of human nature, and human nature remains more or less constant.  
• Technical principles can also be applied to any freely traded entity in any time frame.  
• A trend reversal signal on a 5-minute bar chart is based on the same indicators as one on a monthly chart; only the significance is different.  Shorter time frames reflect shorter trends and are therefore less significant.   

Since the 1970s, the time horizon of virtually all market participants has shrunk considerably.

• As a result, technical analysis has become very popular for implementing short-term timing strategies.  
• This use may lead to great disappointment.

There is a rough correlation between the reliability of the technical indicators and the time span being monitored.

• Even short-term traders with a 1- to 3-week time horizon need to have some understanding of the direction and maturity of the main or primary trend.  
• This is because mistakes are usually made by taking on positions that go against the direction of the main trend.  
• If a whipsaw is going to develop, it will usually arise from a contra-trend signal.

To be successful, technical analysis should be regarded as the art of assessing the technical position of a particular security with the aid of several scientifically researched indicators. 

• Although many of the mechanistic techniques offer reliable indications of changing market conditions, all suffer from the common characteristic that they can, and often do, fail to operate satisfactorily.  
• This attribute present no problem to the consciously disciplined investor or trader, since a good working knowledge of the principles underlying major price movements in financial markets and a balanced view of the overall technical position offer a superior framework within which to operate.  

There is no substitute for independent thought.

• The action of the technical indicators illustrates the underlying characteristics of any market and it is up to the analyst to put the pieces of the jigsaw puzzle together and develop a working hypothesis.
• The task is by no means easy, as initial success can lead to overconfidence and arrogance.  

"Pride of opinion caused the downfall of more men on Wall Street than all the other opinions put together."  Charles H. Dow, the father of technical analysis.

This is true because markets are essentially a reflection of people in action.

• Normally, such activity develops on a reasonably predictable path.  
• Since people can and do change their minds, price trends in the market can deviate unexpectedly from their anticipated course.  
• To avoid serious trouble, investors, and especially traders, must adjust their attitudes as changes in the technical position emerge.

A study of the market can also reveal much about human nature, both from observing other people in action and from the aspect of self-development.  

• As investors react to the constant struggle through which the market will undoubtedly put them, they will also learn a little about their own makeup.  

"Little minds are taxed and subdued by misfortune but great minds rise above it."  Washington Irving.



Martin J. Pring
Technical Analysis Explained

Three common approaches employed in the stock market: Value investing, Growth Investing and Technical Investing

There are essentially 3 types of investing employed in the stock market, namely:

1. value investing
2. growth investing
3. technical investing.

Value investing was taught by Benjamin Graham.

Growth investing was shared by Philip Fisher.

Warren Buffett started off as a strict value investor of Benjamin Graham type.  He has since incorporated a lot of Philip Fisher's teaching into his investing.

In effect, Warren Buffett teaches that value and growth investing are essentially different sides of a same coin.  What is investing if not value investing, that is, buying something for less than its intrinsic value?

Value investing and growth investing are most suited for those with a long term investing horizon.

Most successful long term investors are essentially value investors.

They hold long term portfolios that have compounded in values over a long period of investing.

Technical investing are employed mainly by those with short term focus in their investing.  

The majority of traders in the market are technical "investors".




Additional notes:

Fundamental analysis is both qualitative and quantitative.

In fact, in my practice, qualitative is the more important analysis.

The ability to understand the business ensures that you are investing in a great company within your circle of competence.

Some combine the fundamental with the technical, and feel that they have an edge when doing so.

Personally, technical analysis has played little role in my investing so far.

Technical Analysis - A Beginner's Guide

Past performance is no guarantee of future results.

Charts do not predict the future from the past.

They seek to find current buying and selling patterns in the past and plan their own course of action once those patterns end.

It is based on probabilities, not forecasting.




Why does it work?

Chart patterns are formed by the buying and selling actions of people, and people tend to act in a similar manner when faced with similar situations.

Some blame this on a self-fulfilling prophecy.

If enough investors believe in the significance of a chart pattern ending then they will act, and thus their actions will assure that the assumed result will occur.

But investors may not act the same way this time and the charts will tell us when that is the case quickly, before losses begin to mount.




Note that technical analysis expects to have losses.

It is in minimising those losses and recognizing when a winner has more room to go that there is success - read consistent profits - in a portfolio.

No other method of analysis includes as a standard feature the possibility that things will not work out as planned.  




Charts need not be adversarial with other forms of analysis.

Charts can be used as tools to help with the other forms of analysis.

Whether it is a sanity check on the fundamentals, or something that tips us off on changing fundamentals in a sector, charts will enhance investing results.

Charts are tools, not crystal balls.

They help investors find good investments and just as importantly avoid bad ones.

A picture is worth a thousand words and charts can be put into action to help investors make and keep money.


Ref:  Michael Kahn

The PE: On its way out? For the Intelligent Investor, the PE emerges as the perfect tool to evaluate the degree of disconnect between the herd and reality.

August 31st, 2010

The Wall Street Journal strikes again! This time it’s an article entitled “The Decline of the PE Ratio.” And once again, it was too hard to pass up as a topic for this blog.

The first sentence alleges that the PE ratio “is shrinking in size and importance.” And it points out that, in spite of the fact that U.S. companies announced record profits during the second quarter—beating forecasts by more than 10%—the market dropped 5% this month.

It goes on to connect the dots, making the point that “the market’s average price/earnings ratio…is in free fall, having plunged about 36% during the past year,” and claiming that, because PEs have declined while earnings have risen, that the PE ratio may no longer be a reasonable metric by which to value the market. They’re absolutely right…if the market is what you invest in!

I submit that this article simply puts the cart before the horse and lets the tail wag the dog! (How’s that for mixing a barnyard full of metaphors!)

If the exercise is to analyze the market for the purpose of forecasting where it’s going next—a waste of time for my money, but a preoccupation of the herd—then they’re right in saying the PE has little importance. It never really did! Technical analysis, the tool of the market analyst, never could be  bothered with earnings, or the other fundamentals.  The market is driven by anything but company performance, as the article correctly point out.

However, for the intelligent investor who has only a passing interest in the meanderings of the market, the PE emerges as the perfect tool to evaluate the degree of disconnect between the herd and reality. The lower the PE, especially in the face of growing corporate earnings, the more obvious it becomes that the herd doesn’t understand the nature of investing, and the wider the abyss between the herd and those who understand what investing really is.

And the easier it is to find bargains out there.

To understand the real value of the Price/Earnings ratio, read What’s a PE, and What’s it to Me?

http://www.financialiteracy.us/wordpress/2010/08/31/the-pe-on-its-way-out/#more-2331





Wall Street Journal

The Decline of the P/E Ratio

BY BEN LEVISOHN

As investors fixate on the global forces whipsawing the markets, one fundamental measure of stock-market value, the price/earnings ratio, is shrinking in size and importance.

And the diminution might not stop for a while.

The P/E ratio, thrust into prominence during the 1930s by value investors Benjamin Graham and David Dodd, measures the amount of money investors are paying for a company's earnings. Typically, companies that post strong earnings growth enjoy richer stock prices and fatter P/E ratios than those that don't.

But while U.S. companies announced record profits during the second quarter, and beat forecasts by a comfortable 10% ....

Why More Ignorant Money Is Lost To Less Smart Money

A.K.A Why there are more losers than winners in the market

Through the years, trading has always been a pipe dream for most who wanted to get filthy rich. With the advancements in technology over the last decade, this pipe dream has been brought closer to home than ever before. Today, it is a very accessible dream to anyone and everyone. All you need is a computer and an Internet connection.

And of course, you need the right kind of market.

This is where the hype starts. We have been over-exposed to all sorts of advertising and promotional rah-rah that makes us believe that it is actually possible to make that fortune a reality. We see ads with winners making really fantastic profits from a single trade and we hear of friends who make a living from trading and living the good life. We see the rich and famous on TV that have made fortunes in the market. We read about people making fortunes from the comfort of their homes.

We believe we can be one of them. Worse, we believe it is really that easy.

What we don’t see in most cases is the real ugly truth. We don’t get to see losers, we never see the many hundreds or thousands that get wiped out and we definitely never hear what happens to the few winners when the market turns.

We never get to see how difficult it is for those successful few to make that living. We don’t see how much studying, hard work and endless hours of practice it takes to achieve that “easy” life. We definitely don’t hear about how much losses were accrued before the wealth accumulation started.

When the market is rallying at full steam, you always get to see new gurus hyping up their courses, authors of all sorts publishing their version of making a fortune from the market and everyone rushing to brokerages to get an account open. Workshops of all kinds will be touting their software that makes profits without the trader having to put in much effort. Some gurus will adapt their classes to ride the trend of the market – if Options is the way to go, you’ll get Options teachers by the dozens … if Forex is the flavor of the trend, then that’s what you’ll get lots of.

The market in itself is hyped. When everything is running up the charts, it is so easy to make money from the market. Everyone seems to be getting in on the action when a bull run is in full steam. The hype worsens as these bull-run winners put more money into the market to help the rally climb even higher. Pretty much like what is happening in our property market today. The “Aunties” and “Uncles” at the coffee shop also seem to have the best tips and everyone in the neighborhood is an expert at stock picking.

Scandals also abound when the market is in full hype. Hedge funds and pillion-trading are two of the many ways these scandals begin. In some recent cases, the owner of the fund starts living lavishly on his clients’ monies even before the fund is profitable. This adds to the hype. We see fund managers driving fancy sports cars and living it up in penthouse condos and sprawling landed properties. Everyone wants that life and the market can give it to you.

So the average Joe, or in our case, Ah Seng, joins the hype bandwagon and puts his hard earned money into a few bets in the market. It makes money for sure. The bull-run continues. So Ah Seng buys more and grows his wealth. He tells his friend, Ah Huat, about it and he joins the bandwagon. Soon, the market is flooded with Ah Sengs and Ah Huats who know little about the danger they just got themselves into.

The fact is the market had already been running up like mad which is where all the hype came from. By the time the new gurus, workshops and books emerge, the rally is almost always halfway there. This is when the aunties and uncles get wind of the easy money and this brings on the Sengs and Huats. Next thing you know, the market is over-cooked. Yet it continues to rally, albeit on suspiciously lower volumes.

The lower volumes are an indication that the smart money is already sidelined and waiting for the inevitable. The smart money knows when to get out and stay out. They know because the ignorant money has started to flood the market.

“When the market is greedy, you should be fearful.” ~ Warren Buffet

Then the inevitable happens – the market stutters and falters … the easy money slows down … volatility begins to rule the market … the ignorant money slowly realize that they have left their asses hanging in the wind without protection. But they’ll continue to live in denial because of the hype.

The market slides south. But not in a hyped-up crash, mind you. The market is a sneaky place that gives you more rope than you need to hang yourself repeatedly. It takes a slow and steady slide with the occasional bull-trap to keep the ignorant money believing that the correction is a “normal” thing in this business. After a brief reprieve to bring hope to those living in denial, and possibly bring in more ignorant money, the market continues its sneaky slide south. This goes on for a while and before the ignorant money realizes it, more than half the investment is down the toilet.

By this time, some of the gurus quietly “disappear” from the press, some workshops cease to exist, software traders start complaining that the systems are not working as promised, fund managers appear in the news for the wrong reasons and my class starts filling out with dozens of traders looking for a fix and a more realistic way to survive the market.

The market gets down to an impossible low. Gone is the hype and all that came with it. In its wake, it leaves a massive trail of destroyed lives and emptied bank accounts. The market is now “a dangerous place” when it was once a dream maker. The market is a “casino” when it was once an ATM. When the hype is all gone along with the money, people get serious and stay away from the market.

This is when the smart money returns.

And this starts a new hype cycle that brings in the new ignorant money.

The question you should be asking is not; “When will the ignorant money start to suffer?” If you thought of asking that question, YOU are the ignorant money.

The only question you should be asking is; “How do I become the Smart Money?”

To get the answer to that question, we commit to the next big mistake – The Education.

Most people know that trading is a stressful and dangerous job. Most also know that it isn’t easy and takes a lot of work and learning. Of course, there are the few who believe that the market can be beaten with a system or with some high-tech software. Then there are those who cling on to the ignorant belief that the market is a place that can get them rich quick.

Let’s not waste time discussing the dreamers and ignoramuses. Rather, lets look at the fellow who knows what it takes and is ready to work for it. Let’s look at the fellow who sincerely wants to learn all there is to know about this business but is unable or unwilling to get a formal education for it. It has been argued that one is able to learn about trading by reading books and obtaining information through the Internet.

So if it is that simple, why do so many still fail? The answer is just as simple; Learning the wrong thing without realizing it.

Most of the books available, either at bookshops or at the library are about INVESTING and very few are actually about TRADING. So what happens is that most people don’t realize the real difference between investing and trading and will assume the two to be the same with slight variances. That could not be farther from the truth.

Investing is much easier to learn – like learning to drive a Honda Jazz. It doesn’t take much to learn it and it is easily understood and put into practice without much difficulty. The trick thereafter is not to crash.

Trading, on the other hand, is a very different skill and mind set. It is akin to driving a Formula 1 car. Unlike the Honda where the manual version has the clutch on the left foot, the F1 car’s clutch is a very different mechanism and is controlled by the right hand. Unlike the Honda which packs less than 80bhp, the F1 car stacks up an earth-shattering 900+bhp which, in untrained and inexperienced hands, could end up killing the driver.

There is so much more to trading than investing. The skills involved are very different, the psychology is worlds apart, the knowledge needed requires way more weeks and even months to acquire and the amount of research needed to be a good investor is nothing compared to the daily research and monitoring the trader is required to do to survive the market day in and day out. Where investing requires little or no practice, trading demands hours and hours of practice time to hone the skill. The financial management skills are also extremely different in that the investor protects his capital by how much he invests while the trader requires a different skill set to manage his finances – its called “cutting loss” – something easier said than done.

So without realizing it, most beginners will pick up an investment book or visit sites hosted by investors or have contributing members who are investors and assume that all that knowledge gained will stand him in good stead as a trader.

And when things don’t work out, it gets confusing. The common query that follows is always, “Why is it others can make it but I can’t?”

You can’t blame the poor fellow because there isn’t much literature on this subject and even some so-called gurus don’t know the difference. But all you have to do to know that this is true is to just look at Wall Street – how come the investors don’t have to be on the floor of the exchange everyday while the ones on the floor everyday are known as traders?

Knowledge … a little of it can kill you quickly while the wrong kind will slowly bleed you to death.

Finally we look at a controversial reason why most traders fail – The Attitude

It starts right at the start where most newcomers think that the market can be a get-rich-quick plan. This is akin to thinking that the market is like a casino. Consider this fact – the house ALWAYS wins. So if you treat the market like a casino, it will make you feel like most gamblers do. Gamblers always win a few but lose a lot.

Some trade like the market is a system to be beaten. Such traders ought to give themselves more credit. You’re insulting yourself if you have this attitude. To think that the market is a system is to include yourself in that system. Therefore, the system you are looking to beat includes you. Give yourself some respect and while you’re doing that, give the market the same respect – we’re not robots in the market and we’re definitely not part of a system. We’re humans that are driven by emotions. The market is an emotional place, not mathematical. You cannot have a system to beat an emotion because there is no math that can factor emotional irrationality.

Then we have those that don’t realize how unscrupulous the market is. Their ignorance is evident when they correctly assume the market is not that clear cut but will still buy into the hype. What is obvious is that the market is made up of all kinds of people especially those who will do anything to get an edge, even through illegal and criminal means. It is also full of experts who have spent years in Harvard and Princeton and then more years with established institutions such as Goldman Sachs, Morgan Stanley and the like. They have hugely experienced mentors to guide them to become the next generation of world class traders. These people have so much leverage and influence on market sentiment and to make their advantage more unfair, they collude with their competitive counterparts in order to corner the larger market for their own gains. With such power, how is a three-day workshop graduate expected to beat the odds? Yet more and more look past the obvious and end up throwing their hard earned money to the power-brokers.

These are also those who buy into the idea that the market can be analyzed fundamentally with valuations. Such valuations do help to reduce risk. But that is an investment-styled strategy and not suited for trading. Trading is way faster and seldom allows the security time to flex its fundamental muscles before the next gyration takes out the profits. Read the previous lesson to know the difference between the investor and the trader and you’ll have a clearer understanding of this.

Others rely purely on technical analysis. I can’t deny that I base a lot of my analysis on technicals. But that is not the end all. All it takes is one bit of macroeconomic news and all that technical analysis is out the window faster than you can say “Cut loss!” Technical Analysis is great as long as there is no news to upset the prevailing sentiment and as long as volumes don’t dip. But the market is never so generous. So in the end, Technical Analysis is only a “best guess” … and contrary to common belief, Technical Analysis is not the best guess of when to buy or sell – rather it is most reliable when used to guess the best potential against the least risk or the most risk against unfavorable potential.

Then there are those who believe that a good tip from a trader is the key to easy money without putting in any effort. For this, I have only one analogy; will you take a heap of hard-earned money out of your wallet and give it to someone you hardly know and expect to get it all back after a few weeks? And if that person was trustworthy, would you still do it? And do you really believe that it will come back with more than you gave him? If in life we don’t make such practices, then the same principles should be applied in the financial world and most of all, in the market. The desire to get-rich-quick-and-easy makes simple people do really silly things with their money. And it is always only after getting burned that you hear those famous last words,” … if only I knew …”. Yes, you’ve heard the horror stories time and again and so has everyone else. Yet people continue to write new chapters into this horror story ever so frequently … all in the name of greed, gluttony and sloth.

The financial markets are like an office block in a busy business district. The people who go to work there are serious professionals who take what they do very seriously. They are highly experienced, very influential and extremely powerful. It is also like a hospital where the surgeons, doctors and nurses are highly qualified and trained professionals. People put their life in their hands everyday.

Then one day, some over-zealous graduate with three days of workshop knowledge comes into this office block and expects to beat everyone out of their jobs. Or this hyped-up graduate with only three days of experience comes into the hospital and expects everyone to trust him with their lives.

Okay, maybe that is a bit of a stretch but the implications are no different. Every professional takes years to study his craft and then spends more years honing the skills with hours and hours of practice and hard work. They also have a mentor to constantly guide them till the day they are ready to go solo. There is no easy path to success and there will be failures along the way. The financial market is to be respected and feared. There is no other attitude except humility that will help a trader survive it.

It is said that more than 80% of the market is made up of those who lose and less than 20% are winners. The truth is that those statistics apply to any profession – how many top rated lawyers, engineers, surgeons, etc are there compared to the many also-rans?

The big money is always at the top where there are few who have it while the small money is at the bottom where most have to fight for it. And there are only two ways to be at the top – either you are already there or work hard to get there.

http://blog.shareinvestor.com/why-more-ignorant-money-is-lost-to-less-smart-money/

Value Investing - Stock Price

Stock Price  


You can’t buy any stock at any price, right? The price you pay is ultimately determines your rate of return. You want to buy cheap to maximize your earnings.

The actual stock prices consist of two parts: 1) intrinsic value and 2) variance from the human emotion and dynamic market environments. So there are two basic methods to determine the price of a stock: 1) Fundamental Analysis and 2) Technical Analysis.

• Fundamental Analysis determines intrinsic stock prices by projecting future earnings and then applying an acceptable return on    investment to calculate the stock price. This approach is used by most traditional investment analysts.
• Technical Analysis applies statistical charts and techniques to historical stock prices and volumes to identify the future stock price trend. It does not consider the fundamentals of the stock. The business, or economic environment as the influence of these factors is deemed to be already reflected in the stock price.

http://www.trade4rich.com/Price.html