How Do I Start Investing In The Stock Market? (PART 8)

“When to Buy”

After carefully evaluating which stocks to buy, do not click the buy button right away. Instead consider another element of trading and investing – timing.  While a lot of people would say “you can never time the market.” Will it not hurt if you have at least a basis when are you going to buy and sell? If one has no clue as to when to buy, will it be the same dilemma as to when one is selling?  Technical analysis attempts to address this kind of dilemma.  It is believed that technical analysis has some predictive value in trading as well as investing.

How does one read the chart anyway?  How can we pin point a top or a bottom?

Well, here are some basic principles of technical analysis (TA).  First there are “areas” where in we expect buyers and sellers will be present.  By knowing these areas, we are guided to act accordingly.  In TA we call these areas ‘supports’ and ‘resistances’.  Support is a price level by which buyers are expected to come into the market.  On the other hand, resistance is a price level by which sellers are expected to come into the market.  There are essentially three types of supports and resistances.  These are horizontal, angular and psychological.  In the chart below which is the PSEi Weekly the resistances are horizontal where a top is extended to determine the next potential top.  This is the one above 8,000 points.  Whereas an angular one connects two tops to determine the extended resistance line.

From the illustration which is the situation back in March 2017, there is a long running resistance line at 7,400 which originated from 2014 and still working up until today.

What is the relevance of these resistances? A horizontal resistance is an expected top when achieved in the future - two things can happen. Hitting resistance will either hold up or the price break out of it and move upwards.  Breaking it upwards will commence a rise, generally.  Similarly, the descending angular resistance is determined by connecting at least two highs which will determine the subsequent tops.  Two things can happen, either the resistance will hold which will continue the slide or the break of it… that will ensue a rise. This is what happened in about March of 2016 and January of 2017.  Therefore, since the chart above is the current one, the sentiment is upwards because the descending angular resistance is broken and the price continue to move above this level.  However, the horizontal resistance at 7,400 remains a hurdle for now. This is what is being watched by many traders.

On the other hand, the opposite of the resistance is support.  Similarly, it is determined by connecting the lows of the price action then extended to determine the next support levels.  It could also be connecting two lows in the past to extend into a horizontal support.  The relevance of the support level is to provide an entry point from which a potential cut-loss can also be placed whenever the price breaks down under the support.

Without these lines to determine supports and resistances, it will be very difficult to determine entry and exit points.  To summarize, an entry point could be the price nearing support or a price above the resistance after a successful break out.  Subsequently, when a trade is entered on the basis of the support, a stop loss can be initiated when the price reverts below the support line especially on a closing price of a session.  In this case, the price may continue to trek lower.  Conversely, a break out of the resistance can be a buy entry point.  And the return below the resistance can be perceived as a continuation of the downward movement.

All told, identifying supports and resistances can help a trader or an investor plan a trade.  The quantifiable characteristic of technical analysis greatly aids trader’s or investor’s decision making process. If one will follow this, possibly, less mistakes can happen.  This concept can also guide financial advisors in advising clients as to their outlook of the market.  Supposedly, the outlook will somehow correspond to the actual market performance and analysis.

The next item for consideration is the moving averages.  These are known as trend following indicators as it is plotted along the price action.  Moving averages are calculated depending on the parameter used.  By parameter, we mean the number of data used to compute the indicator.  The popular parameter for moving averages is 20 - 50 - 100 - 200 units.  The units refer to the unit of data being computed.  Say if the chart used is a daily one, then the indicator uses 20-50-100-200 days. Sometimes these units of time can be in hourly, weekly or monthly.  A 100 day moving averages means the average price over the past 100 days….computed and plotted daily.  An example of moving averages is one below.   This particular moving averages is a simple one. Thus, it is called simple moving averages.  The other two types are exponential and weighted moving averages.  They all work similarly.

From the illustration, generally, the moving averages move either above the price or below it. From the left side or about the latter half of 2014, the moving averages were both moving below the price.  This means the market is bullish or in upward bias.  By May 2015, after hitting a high above the 8,000 points, the price started moving lower and has gone down below the moving averages.  By this time, the market has turned bearish or in downward bias.  The uptrend did not manifest until about March 2016 when price moved above the moving averages.  This lasted to about July – August of 2016 which afterwards moved below the moving averages again. 

At present, the price is in between the moving averages and has so far cleared only the red line or the 20 week moving averages.  The blue averages or the 50 week provides a ‘resistance’ at about 7,400 points which is congruent or consistent with the horizontal resistance previously discussed.  And that the red averages, seems to be providing a ‘support’ to the price action.

In this regard, moving averages are good guides in determining trends either upward or downward. Traders, investors and advisers alike are able to discern a rising or falling market and make decisions accordingly.

Technical analysis may not have 100% accuracy and will never will.  But the probability of being right on some points can be thrilling and profitable. It is better to decide on trades and investment decisions with a tool or basis rather than nothing.