Market Performance – May 2012

Overall

 

 

 

 

 

 

 

 

 

 

 

 

Currency

 

Commodity

 

 

Candlestick Chart

Candlestick chart is one of the most powerful charts which clearly indicates the psychology of the stock prices. Within one candlestick, it shows below important information:

1. Open Price

2. Close Price

3. Highest Price

4. Lowest Price

5. Colour of body
– The area between open price and close price is known as body.
– White body indicates price opens lower, closes higher.
– Red/Black body indicates price opens higher, closes lower.

6. Upper shadow
– For white candlestick, it is area between highest price and close price.
– For red/black candlestick, it is the area between highest price and open price.

7. Lower shadow
– For white candlestick, it is area between lowest price and open price.
– For red/black candlestick, it is the area between lowest price and close price.

Example:

Chart courtesy of StockCharts.com

Why Is It useful?

Indication Of Whether Bull or Bear Is In Charge

Example:

Chart courtesy of StockCharts.com

Indication Of Potential Trend Reversal

Example:

Chart courtesy of StockCharts.com

Indication Of Support And Resistance

Example

Chart courtesy of StockCharts.com

Volume

Volume is very useful in telling how strong the trend is moving. Trend moves like a river current, how strong the current depends on the forces behind pushing the current. That stronger the volume, the stronger the forces are pushing and forming the trend.

Downtrend

When you combine volume, candlestick chart and moving averages, it tells a lot of story.  Imagine, though the stock prices are moving up in low volume, then comes a sudden spike of high volume, that bring down the stock prices in which the red bearish candlestick breaks the moving averages. Then comes the downtrend. One good example below:

Chart courtesy of StockCharts.com

Uptrend

On the other hand, when most of the white bullish candlesticks are supported by stronger volume, and it stays above moving averages, occasional low volume of red bearish candlesticks failed to bring the stock into a downtrend. Another good example below:

Chart courtesy of StockCharts.com

Support & Resistance

Using trend lines to create support & resistance is a straight forward way to establish a buy or sell target. When the prices broke a key resistance level, it might continue in uptrend. When the prices broke a key support level, it might continue in downtrend. Candlestick chart is the best way to represent this, because it clearly displays the lowest close and highest close of each day.

Let’s look at some examples below:

Uptrend – When Stock Prices Are Moving Within The Range Of Support/Resistance Level

 Chart courtesy of StockCharts.com

Breakout -When Stock Prices Break Key Support/Resistance Level

Chart courtesy of StockCharts.com

Relative Strength Index (RSI)

Relative Strength Index (RSI) is technical indicator which is used to detect if the stock price is overbought or oversold. It is calculated based on a period of historical days of gain against loss.

The formula is as follow:

RSI = 100 – 100/(1 + Average Number of Days Gain / Average Number of Days Loss)

Most commonly, the below are the configuration parameters:

Average Number of Days –> 14 days

Overbought zone –> 70 to 100

Oversold zone –> 0 to 30

Neutral zone –> 30 to 70

Trend Reversal or Correction When RSI Signal Overbought or Oversold

Chart courtesy of StockCharts.com

In my opinion, RSI is a powerful indicator when it is used together with other technical indicators such as Moving Averages or MACD. But most importantly, always remember is a absolute MUST to study the fundamental value of the company to gauge the margin of safety.

There is no 100% accurate technical indicators. Technical indicators are the assistant, fundamental analysis is the decision maker.

Moving Average Convergence Divergence (MACD)

Moving Average Convergence Divergence (MACD) is a momentum trend following indicator. Most common configuration is MACD (12, 26, and 9). It consists of three components.

MACD Line – Plot by calculating the differences between 12 and 26 days Exponential Moving Averages (EMA).

Signal Line – Plot by using 9 days Exponential Moving Averages (EMA).

MACD Histogram – Plot by calculating the difference between MACD Line and Signal Line.

MACD can be interpreted as:

Trend reversal when MACD line crosses the signal line

Chart courtesy of StockCharts.com

As you can see the accuracy is not 100%, but it does help to generate buy or sell signal depends on investor’s risk appetite.

Trend reversal when MACD line and stock price creates a divergence

Chart courtesy of StockCharts.com

Continuation trend when MACD line crosses zero and MACD line stays above signal line

Chart courtesy of StockCharts.com

Trend reversal when MACD histogram and stock price creates a Divergence

Chart courtesy of StockCharts.com

Types of ETFs (Part 3)

Commodity ETFs

Commodity ETFs offer investors to invest in commodity, which offer as an alternative to buying physical commodity or futures contract. Inverse commodity ETFs are also available, which allow investors to make profit when the prices of commodity fall, as well as leverage commodity ETFs which allow investor to double the return.

Below are some of the commodity ETFs:

Ticker Symbol Commodity ETF
GLD Gold Trust
USO Crude Oil
UCO Crude Oil (2x)
SLV Silver Trust
BOIL Natural Gas (2x)
SCO Short Crude Oil (-2x)
KOLD Short Natural Gas (-2x)
GLL Short Gold (-2x)
ZSL Short Silver (-2x)

More information can be found from:

https://www.spdrs.com

http://www.proshares.com/

http://www.ishares.com

How Do You Evaluate ETF?

The best way to protect investors in investing ETF is to read the prospectus, and understand the strategies, costs, risks and investment goals. The ETF prospectus can be obtained from the website of the company that manage and issue the commodity ETFs, else, get it from the broker.

Risk of ETF?

It is possible that the fund manager committed mistakes and result in tracking the movement of the underlying assets. This is known as tracking error which causes the investor to suffer unrealised losses if he/she chooses to buy or sell during the period of tracking error. This is even more likely with leverage and inverse ETFs, since it requires more complex skills for the fund manager to perform the tracking.