Could the present market situation lead to a more serious consequence than a simple throwback?
When it hit the all-time high of 4,515.77 last July 20, it never had the chance to repeat the feat. As of the end of trading last week, while the market was still 25.27 points higher on a weekly basis, it was 32.14 points lower from the recently established all-time high.
Based on anticipated or traditional local investors’ outlook for August, further confounded by the current economic and financial concerns that continue to stalk the US economy (the world’s equity market trend setter), it is feared that the present upward movement of our local market may be at risk.
Splitting terminologies
In technical analysis, price movements are given particular names on the basis of their characteristics and, most importantly, resulting significance—as when they are moving up, going down or simply traveling sideways.
These main categories of price movements are further divided and classified into subcategories. Again, distinguished by their resulting significance.
For example, a “throwback” is one of the many other terms used to describe and indicate a retreat in the movement of a stock or market similar to what is known as “correction, pullback, retracement or reversal.”
However, they are not the same. They are different and distinctly separate from each other judging from the way they affect the resulting pattern and direction of the market.
Like “when the price of a stock moves back toward its recent breakout level,” said price behavior or pattern of movement is called a “throwback.”
This “throwback,” when it happens, is said to lead to the “confirmation on the validity of the new momentum.”
A “correction,” on the other hand, is a decline in the price of a stock or a loss in the market as a whole that amounts to no less than 10 percent. It is relatively abrupt and temporary in nature.
It arises as a result of the concerted action taken by investors on the basis of their general perception or overview on how stock prices are already overbought (overpriced) or on what they feel about the market on the whole at the moment.
Corrections may be expected to happen, too, when stock prices are becoming higher in relation to company earnings and other indicators of economic health.
Also, when a market correction is greater than 10 percent but not quickly reacting to recover, some declare it to signal the beginning of a bear market. Otherwise, it is taken to mean as the starting point of a “reversal.”
In the end, a “correction” is said to be a necessary event that contributes to better price stability and healthy market.
A “reversal” is identified and distinguished by the “recognizable change” it makes in the structure in the trend of the market or stock price.
On the one hand, a stock price or market movement is said to be on a “downward reversal” when the prevailing trend is changed or broken by “a series lower highs and lower lows.”
An “uptrend reversal,” on the other hand, is said to have been established when the prevailing trend is changed or broken again by “a series of higher highs and higher lows.”
A “pullback” or “retracement” is but a modification of the concept of a “correction” or “throwback” in as far as “the sudden turning back or reversion to an earlier type or character” is concerned.
Bottom-line spin
The review on the descriptions and meaning of the forgoing market terms and terminologies may not yet have any immediate connection or relevant implication on the actual condition and context of the market. But what could be the proper lesson earned from this review is the need to take on new trading strategies now.
While the market stayed strong last month, the power of its momentum could be suffering. It has broken through market highs after highs, but after reaching the new record high of 4,515.77 last July 20, it no longer seems to have the power to do the feat again.
On the week it happened, the market only made a net advance of 19.62 points compared to the weekly net advance of 67.28 points gained the week before.
When trading ended last week, while the weekly market advance amounted to 25.27 points, or some 5.65 points higher than the week before, the gain was neither significant nor worth any meaning or note.
At best, it was a positive market performance that could be considered still healthy. But at the rate it has slowed down in the last two weeks, the market seems to be losing steam.
To my mind, I could see that the market is losing momentum because it is not about to make a throwback or healthy correction. Instead, this is because market volume and value turnover transactions are no longer getting any better in the meantime.
On the whole, though, I certainly feel that the market’s upward trend is still intact. In view of this, I recommend a review on stock positions for the purpose of doing “limited trading sell on selected issues” depending on their technical circumstances. A “selective buy” is likewise advised on selected issues on the basis of their fundamental predicaments.
(The writer is a licensed stockbroker of Eagle Equities Inc. You may reach the Market Rider at marketrider@inquirer.com.ph or directly at www.kapitaltek.com.)