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Final notes on stock evaluation methods

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Last in our review of stock evaluation methods, which we were not able to cover last week due to space constraints, are the measuring tools used in technical analysis.

Like in our notes on fundamental analysis, we will take up the most commonly used measuring tools. Before we proceed, let’s breeze through what has been happening in the market.

The market started to head south right after it hit the all-time high of 7,392.20 in the middle of May.

The fall gathered speed in the last week of May when it took a weekly loss of 246.96 points.  This was followed by another weekly loss of 321 points.  By then, it was the first week of June and the total market loss had reached 567.96 points or 7.68 percent.

The market fell further in the second week of June.  The cause was more fundamental than technical.  There was a global sell-down triggered by the unexpected “potential policy shift” announced by the US Federal Reserve in its program to shore up the US economy.  In particular, this was the possible termination of the $85-billion-a-month bond-buying program of the Fed.

That week, the market fell by as much as 459.69 points, bringing total losses to 1,027.65 points or 13.9 percent.

Most of what the market lost that week came from just two days of trading. It further fell by 60.09 points in the week ending June 21, when the market stood at 6,182.17.

At this point, the market had lost 1,087.74 points or 14.71 percent from its peak. This also meant the market had given up 36.02 percent of its accumulated gains for the year of 3,020.24 points.

The market regained 283.11 points when it closed for the month of June.  Losses were reduced to 804.63 points with the market at 6,465.28. From then on, the market has climbed steadily.

Technical measuring tools

Technical indicators can help identify price trends and their turning points.  “They can provide a deeper insight into the balance of power between bulls (buyers) and bears (sellers),” for the main premise of technical analysis is that supply and demand drive prices.

The first indicator is “volume.”  You always see this reported in the daily stock quotation report.  It’s not a ratio but just the aggregate number of shares transacted. It could pertain to transactions for the day, week or any given period of time.

The volume of stock transactions “is a good indicator of how much interest the people have in the stock.”

Next is the “relative strength index” (RSI), a price momentum indicator.  It shows how a stock’S price has performed.  “It compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions” of stock prices.

From the chart, the RSI ranges from 0 to 100.  A stock is overbought (overpriced) when its RSI reaches 70. It is oversold (underpriced) when the RSI hits 30.

The RSI is found to give false buy or sell signals when stock prices go through large surges and drops.  But “it is best used as a valuable complement to other stock-picking tools.”

Devised earlier than RSI is the moving average (MA), although its variants are relatively new. In its simplest form, MA is “the value of a (price) data in its time window.”  A 5-day MA shows the average price of the stock for the past five days, while a 20-day MA shows the average price for the past 20 days, and so on.

A big favorite is the “moving average convergence-divergence” (MACD) indicator.  It’s another trend-following momentum indicator that “shows the relationship between two moving averages of prices.  The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA.  A nine-day EMA of the MACD, called the ‘signal line,’ is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.”

Last, is “stochastic.” It’s an oscillator and price momentum indicator, too.  It “compares a stock’s closing price to its closing price range over a given time.”

The philosophy behind this indicator “is that in an upward-trending market, prices tend to close near their high, and during a downward-trending market, prices tend to close near their low.”  Following the formula of this indicator, “the signal to transact occurs when the  ‘%K’ crosses through a three-period moving average called the ‘%D.’”

Technical analysis has its strength.  It can supplement fundamental analysis in evaluating stocks to enhance your chances of having a winning hand in the market.

Bottom line spin

The market’s upward trend this month still looks doubtful. The market made a weekly gain of only 35.2 points in the first week, 73.73 points in the second week and 46.81 points in the third week.

The market’s 142.6-point gain last week was the result of early trading gains for the week. It actually fell in the last two trading days of that week.

This behavior of the market may be indicative of how it will perform this week.  To my calculations, the market may, at best, trade sideways.

Galoc oil phase 2 drilling

With the new drilling work that started in June, the Galoc oil field is reportedly set to deliver more than 12,000 barrels of oil a day by the fourth quarter of this year.  This will be 150 percent higher than the oilfield’s published current production of “4,750 barrels per day.”

Cash calls have been made and payments by the partners, except ASX-listed Nido Petroleum Ltd. (NDO), were on time.  NDO was earlier declared in default for failing to meet the deadline but was able to pay its obligations later.

Local representatives claimed  the delay in NDO’s payment was due to some “processing” issues in the organization. More importantly, they said “there was already an order to pay before the deadline.”

Granting all these explanations, some “friends” of management down under still take issue of the incident.  Accordingly, “The delay was inexcusable and a downright management lapse.  It was irresponsible.  It brought to peril stockholders’ interest in the project.”

(The writer is a licensed stockbroker of Eagle Equities Inc.  He may be reached through marketrider@inquirer.com.ph , densomera@msn.com or at www.kapitaltek.com)


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  • OFW_Investor

    In Investing , Degree of Difficulty does not count ,success is not measured using Olympic Diving Methods.. The best Investments are the easiest to make. All the math one needs can be found in the 6th grade. An Investor must be willing to walk away if he does not understand esoteric formulas and stick to his circle of competence.

  • OFW_Investor

    In the stock market, Price is what you pay and value is what you get. Rational Investors should make a purchase only if it suits its book. Buying a stock based on price action, momentum,volume, moving average, etc is a foolish endeavor for majority of Rational Investors. In the hunger for a single statistic, Investors have forgotten that it is better to be approximately right than precisely wrong.

    Our criteria for buying stocks

    leading or strong 2nd in the industry it is in with wide economic moat. (think SMC Beer)
    Management with owner like orientation
    Demonstrated consistent earnings power
    pays a dividend
    Good Business Prospects
    Available at an attractive price



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