Using Simple “Technical Analysis” to survive in Dhaka Stock Exchange

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 . . .