Using Simple “Technical Analysis”
to survive in Dhaka Stock Exchange
by Imtiaz Alam Choudhury, a student of the market (5 Nov 2016)
Each person has his/her own individual style of investing. It
is better if one bases the decision based on analysis – whether Fundamental or
Technical or a combination of both – rather than on “tips”.
Moreover,
decision-making is also important – it is important to execute rather than be
stuck with “paralysis by analysis”. Many good analysts at times struggle to
make good decisions and miss out on a good trading opportunity.
In this article, I will try to describe a simple Technical
Analysis tool that might be helpful to sustain profitably in Dhaka Stock
Exchange. Before that, I would like to discuss General Market Conditions and
“What is Technical Analysis?” Another thing is that I will mainly talk from a
trader’s perspective (for the stock/s are held less than a year at most) while
an investor is in for the long-term.
General Market Conditions: I personally think the current
Index (DSEX) level for Bangladesh is OK. If we consider the period from 01 November
2013 till 01 November 2016, we could say the Index is range-bound to an extent.
It was around 4,000 at the beginning of Nov ’13 and is around 4,600 at Nov ’16.
Between these three years, Index rose to a High of 5,368 and visited the Low of
3,956. Approximately, we could say Index was between 4,000 to 5,000 (with the
only exception between Sep ’14 to Nov ‘14).
Thus, a strategy might work better
during this “range-bound” period than in different market conditions like a
bull-trending market – that is not to say that it does not work but to
highlight that other strategies like pennant/bull combined with Fibonacci
retracement ratios might give quicker returns for the more risk-prone trader
(but that is for another article).
Others might not agree that the Index is OK. Many would like
it as it was from Oct 2009 to Dec 2010! But that was an exception – it was a
speculative bubble that gave investors good return during those periods but
also caused a lot of pain once the bubble burst. Moreover, the land asset
bubble also burst a few months later and prices are still coming down to
reality – and in this period, many real estate firms have gone out of business
leaving huge amounts of Non-performing loans (NPL) with the banks – whose
assets and stock price have nose-dived – and some banks’ stock prices are still
even less than their respective par value!
Such bubbles are not good for the economy – and it has
happened in several countries. Earliest records of bubbles date from:
1630’s – The Tulipmania in Holland – after which, the
economy of Holland suffered many years.
1720’s – The South Sea Bubble in England.
1930’s – the Great Depression in USA after the 1929 Market
Crash.
1990’s – the Stock and Property Bubbles burst in Japan – and
it has still not recovered!
2010 – Bangladesh stock market bubble crashed, followed by
the “Real-estate” crash.
Bangladesh economy is not growing fast with hardly any
growth in imports in recent times. Exports and remittance are not growing fast
and banks are left with cash as entrepreneurs are not investing and/or
expanding. Thus, I said that the current index level is OK. And I think a
better future for the economy is one where capital is used in more productive
resources than “running after paper money”. (A very good book that discusses
Bubbles is “Irrational Exuberance” written by Nobel Prize winner Robert J.
Shiller).
What is Technical Analysis? It is a security analysis
methodology for forecasting the direction of prices through the study of past
market data, primarily price and volume (from Wikipedia). The basis of TA is:
·
Market action (price) discounts everything: Technicians
believe that the current price fully reflects all available information.
·
Prices move in trends: That is price movements
are not totally random.
·
History tends to repeat
itself: Technical analysts believe that investors collectively repeat the
behavior of the investors that preceded them. Because investor behavior repeats
itself so often, technicians believe that recognizable (and predictable) price
patterns will develop on a chart (from Wikipedia).
Now let us return to the main article.
I am not that good a Fundamental Analyst as Fundamental
Analysis requires analysis of many variables. What I mainly look for is a company
that consistently gives Cash Dividend (if it also gives stock dividend, then
also fine, in some cases, even better) – to me, it signifies that the company
is making “real” profit and can thus, disburse cash. (A cautious note here is that
there is no one size that fits all approach – there are a few suspect companies
which give cash bonus mainly from reserves!) But what this filter does is help
the trader to manage a reasonable number of stocks from all that are traded on
the exchange.
Out of 325+ companies listed in Dhaka Stock Exchange, around
100+ have given cash dividend at least in the last two years. Among those, many
companies have a steady stream of revenue and/or EPS growth. Quite a few are
even growing in the last two years. The more conservative the trader, the more
rigorous could be the selection criteria.
Now we have to study historical price movement and try to find a pattern that
repeats itself. I like a "Trading Range" from Low to a peak which has
occurred every year in the past two years. In Technical terms, it is called Support
and Resistance. We study historical patterns and expect the pattern to repeat
as the charts reflect human emotions and it is same across different markets
and time periods.
The idea is to buy at Low – what to Technical Analysts is “Support” and then
sell at High, which are areas of “Resistance”. And in the mean time to wait to
earn profit – or as Warren Buffett puts it nicely “The stock market is a device
for transferring money from the impatient to the patient.”
Support and resistance levels are important in terms
of market psychology and supply and demand. Support and resistance levels are
the levels at which a lot of traders are willing to buy the stock (support) or
sell it (resistance). Support levels form at price levels where previous buyers
are reluctant to sell below that price – and supply becomes dry. Traders and
mainly investors then try to pick the stocks at the low price level with the
objective of selling higher at a future date. After a period of time, as the
stock rises on better earnings or dividends, it reaches a level of price where
previous buyers are “trapped” – once they get the opportunity to break even
(after months of waiting), they start selling and then supply overwhelms demand
and price starts to fall. This cycle repeats most of the time like waves.
Now let me try to give a few examples with charts. Accept
some deviations in price (Technical Analysis is not a Science so the numbers
will not always be “exact”).
Note: This is
not an article to suggest buy and sell – it is only to show a strategy where
real life examples were used. Un-adjusted charts from stockbangladesh.com and
Data from dsebd.org have been used.
United Finance:
Following is a weekly chart of Unitedfin for last 2
years.
From May 2015 till Nov 2016, United Finance has
approximated a trading range from 16.5 to 21+. At times, it has even come down
to 16 and has also peaked around 24. But the cautious trader could have collected
at Support 16.5 and sold at Resistance 21 (around 25%+ return each time) – it
gave 3 such opportunities in last 24 months.
Its earnings are steady. Profit has increased in last
3 years and EPS is steady (>2) in last 3 years with consistent dividend of
5% Cash and 10% Bonus share.
Uttara Bank
Following is a weekly chart of Uttarabank for last 2
years.
From May 2015 till Nov 2016, Uttara Bank has
approximated a trading range from 17 to 22+. At times, it has even come down to
16.5 and has also peaked around 25. But the cautious trader could have
collected at Support 17 and sold at Resistance 22 (around 27%+ return each
time) – it gave 2 such opportunities in last 24 months. Recently it is showing
more of an uptrend than a downtrend.
Its earnings are fine. Profit has increased in last 3
years and EPS is steady (>3.5) in last 3 years with consistent dividend of 20%
Cash in last 2 years.
Phoenix Finance:
Following is a weekly chart of Phoenixfin for last 2
years.
From May 2015 till Nov 2016, Phoenix Finance has
approximated a trading range from 15 to 22+. At times, it has even come down to
14.5 and has also peaked around 25. But the cautious trader could have
collected at Support 15.5 and sold at Resistance 22 (around 40% return each
time) – it gave 3 such opportunities in last 24 months. Recently it is showing
more of an uptrend than a downtrend.
Its earnings are not consistent. Annual profit and EPS
varies but it has given 20% Cash Dividend in last 3 years.
*Note: Profit, EPS, etc might not be to the liking of
the Fundamental analyst but a consistent pattern in price is there for the
“cautious” Technical trader.
BD Com
Following is a weekly chart of BDCOM for last 2 years.
From Nov 2014 till Nov 2016, BD COM has approximated a
trading range from 22+ to 28+. At times, it has even come down to 20.7 and has
also peaked around 31.5. But the cautious trader could have collected around
Support 22.5 and sold at Resistance 27 (around 20% return each time) – it gave
3 such opportunities in last 24 months.
Its annual profit is increasing and it gives some Cash
Dividend with some Stock Bonus.
Thus, a strategy could be adjusted upon the
risk-taking nature and flexibility of the trader. But what I tried to show is a
simple pattern and one could find quite a number of these to trade throughout
the year. There are other patterns which could also be low-risk low-profit “trades”.
Moreover, Technical Analysts could use confirmations on these with the use of
Candlesticks (there are quite a number of reversal candlesticks/bullish
engulfment’s in the 4 charts shown) and also other Technical Indicators like MACD
cross-over, Stochastics, etc (but I prefer to “keep it simple”). Also a
Technical Trader needs to apply a stop-loss when Support gets broken.
I feel it is a risk-averse strategy which also goes with my personality. Others
might also call it a Buy low and sell high strategy. More importantly, one has
to follow his/her own strategy or as traders say “Plan your trade and trade
your plan”.
Before ending, I would like to suggest a couple of
things. From experience, I have observed that TA works two-thirds of the time –
so a strategy I use is to buy 3 stocks with same patterns – if at least 2 work
out and the other does not rise or fall (when a stop-loss “MUST” be used), then
there is profit in the long run. Another thing is to keep cash and not to be
wiped out from the market – thus, it is safer to have a portfolio – and any one
item should not be allocated more than 10% of total investment. That is, if
that item goes to zero, 90% of capital still remains to operate in the market,
which gives good return for the “slow and steady” trader!
Best wishes . . .
