Market pullback or reversal
The market was down in four out of five trading days last week that it ended 103.45 points, or 2.01 percent, lower on a weekly basis when the Philippine Stock Exchange index (PSEi) closed on Friday at 5,095.92. This happened even if total value turnover rose higher by as much as 29.12 percent at P46.16 billion over the market’s average weekly transaction of P35.75 billion registered in the first three weeks of the month.
A closer look at the daily business transaction of the market for the week, however, reveals that value turnover was actually decreasing each day. For instance, except for Wednesday when several big block sales were executed and where total value turnover for the day amounted to P19.3 billion, the market’s daily transaction only ranged from a high of P7.6 billion on Monday to a low of P6.18 billion on Friday. Along with these trading results, market volume for the week also became very clearly much less. As a result, the market’s direction and outlook appear to be headed to an opposite track, entirely different from the current market trend.
Analysis
Following the above general observations, daily market prices were really increasingly falling last week. As such, the movement of prices appeared to have also indeed changed in direction. In particular, from an opening market index of 5,146.17 on Monday, this fell to 5,042.44 by the close of trading on Friday.
More significantly, the fall in market prices was accompanied by a low volume of transaction. Total volume for the week was equivalent to 18.05 billion shares only, while average weekly volume as established in the first three weeks of the month amounted to about 27.57 billion shares.
In other words, last week’s total market volume was only about half of the weekly average volume for the month.
According to the common definition of the term, a “low volume pullback” is a kind of market situation where the movement of market prices tend to be opposite to that of the prevailing upward direction of the market. Added to that, market volume is significantly very low as in being lower than the market’s established average volume of transaction.
Correspondingly, a “low volume pullback” results in a slight pause in the upward momentum of prices. This is sometimes mistaken to be a reversal by the less trained investor.
And more often than not, a “low volume pullback” is “usually the result of nervous traders trying to close long positions they hold with small profit.” Because of this, “low volume pullbacks” are seen as buying opportunities. This is in addition to the fact that many of the stocks that are going through this situation “have had a large upward price movement.”
Bottom-line spin
According to seasoned investors, any pullback is a sign of a definite trend reversal. It is, therefore, advised not to ignore them much less take them for granted. You are, therefore, admonished to look closely at any market pullback.
With more practice and exposure, however, it is said that you can actually identify and differentiate the changes of market prices and their trading implications. Venturing a fearless conclusion on last week’s market downturn, the market’s fall was the result of what is technically called a “low volume pullback.” Being so, this drop of market prices should prove to be relatively short and technically motivated.
Similar to a “market correction,” the market starting last week could just be in the process of “bringing overbought (overpriced) stocks back to a level closer to their intrinsic (actual) values,” a technical process in which the “weaker hands” are replaced by “stronger hands,” a process seen as necessary in bringing about stability in prices.
But unlike the former, the change in the direction of market prices last week may not entail a decline of 10 percent from peak prices as a “market correction” is technically defined and differentiated. To re-enforce this conclusion, the tally of daily closing indices last week may serve to be a simple corroborative reference.
To review, the market index on Monday ended at 5,127, down 18.22 points. On Tuesday, it settled at 5,102.24, down another 24.76 points. On Wednesday, it closed at 5,037.94, down by another 69.30 points. On Thursday, however, the market closed higher by 5.58 points at 5,043.52. On Friday, it closed slightly lower at 5,042.44, down 1.08 points.
If you will notice, the market index bottomed on Wednesday. On Thursday, it started to climb higher while it closed—insignificantly—lower for the week on Friday. Nonetheless, this pattern of behavior of the market last week seems to be more indicative of a market pullback than a correction. It fits more snugly with the “how and why” a “low volume pullback” occurs.
This is supported by the fact that the Holy Week is now barely a week away. It is most probable that many of the general investing public may have turned “nervous” with this thought that they started to unload last week in a move to play safe from the dullness of the period along with its anticipated market weakness or softness.
To my mind, therefore, this current situation of the market is definitely a “buying opportunity.”
(The writer is a licensed stockbroker of Eagle Equities, Inc. You may reach the Market Rider at [email protected], [email protected] or at www.kapitaltek.com.)
